Gold Miners Are in Deep Schist

by James Brumley | April 8, 2013 11:49 am

If you think gold has been in a nose-dive lately, then you haven’t been watching most of the gold mining industry’s stocks.

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While the SPDR Gold Shares (NYSE:GLD[1]) has lost more than 13% of its value since its early October peak, the Market Vectors Gold Miners ETF (NYSE:GDX[2]) has fallen more than 35% during that same span.

But how can two closely related investment vehicles perform so differently?

Do the Math

Quick quiz: On average, how much did it cost — in total — to dig up an ounce of gold when the metal was priced at its October peak level of $1,803 per ounce?

The answers vary a little, depending on who you ask and the company in question. In an interview about a year ago, AngloGold Ashanti (NYSE:AU[3]) CEO Mark Cutifani said it would be difficult for any miner to produce gold for less than $1,200 per ounce. That’s once all the bills for exploration, mine development, administration and everything else are paid.

Iamgold (NYSE:IAG[4]) paid an “all in” average of $1,162 per ounce in 2011, though its costs were up significantly in 2012, to an average of $1395 per ounce. Thomson Reuters’ Gold Fields Mineral Services division recently reported the average cost to mine an ounce of gold was $1,150 in 2012.

If you need a firm number, though, let’s just say it cost a company between $1,000 and $1,100 per ounce to dig up gold and pay all of its bills back when gold was around $1,800.

So, how much does it cost to dig up an ounce of gold at the metal’s current $1,581 per ounce?

An average of about $1,200.

Mining costs are skyrocketing. Gold Fields Mineral Services calculates that 2012′s cash costs (to mine gold) swelled 17% from 2011’s average, which is on par with the cost increases we’ve seen since 2007. Those same cost hikes are predicted for the foreseeable future.

This puts the gold mining industry in a tough spot. If gold prices keep falling and mining costs keep rising, the business will inevitably become unprofitable again, as it was for many miners before 2007.

Indeed, for some of the mining companies incurring higher-than-average costs, it’s possible that gold prices are already below mining costs. Many miners are getting alarmingly close to their breakeven price levels.

Given the numbers, it’s no wonder so many mining stocks are under pressure. Shareholders are rightfully worried the current trends will continue until these companies are forced into losses. That’s why more than half of the battle for gold mining investors is making a meaningful prediction on gold’s future.

Speaking Of …

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Although gold futures bounced back to a price of $1,581 per ounce on Friday after reaching a low of $1,539 on Thursday, it’s still too soon to assume a rebound is underway … even if the stock market is en route to a correction.

For starters, the bigger trend is still a bearish one, as we’re still in the midst of a string of lower highs and lower lows.

More than that, the bounce at the $1,539 level comes as no surprise. Gold rebounded at that same level in May 2012, and bottomed out at those levels in December 2011. In other words, it’s not surprising that gold tried to stage a recovery at that price.

The war isn’t over yet, though. It will take a couple of efforts from the bears before gold can move under that key floor. If it does move under the support line at $1,539, however, you can expect the selling effort to heat up in a hurry. More than a few would-be sellers are waiting in the wings, holding onto the last vestiges of hope that gold will stop its bleeding.

In fact, gold traders won’t have much to be bullish about unless prices can move above $1,630 (and even then it’s not out of the woods). Gold miners also are hoping for prices above $1,630, as that seems to be the point where most of them can turn an acceptable profit.

Bottom Line

If the support fails to hold up and a move to $1,538 or lower materializes, it’s likely to open the floodgates. Gold mining stocks will follow suit. Just be ready.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:
  1. GLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=GLD
  2. GDX: http://studio-5.financialcontent.com/investplace/quote?Symbol=GDX
  3. AU: http://studio-5.financialcontent.com/investplace/quote?Symbol=AU
  4. IAG: http://studio-5.financialcontent.com/investplace/quote?Symbol=IAG

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