Gold Miners: The Men Are Being Separated From the Boys

by James Brumley | July 29, 2013 9:45 am

The good news is that gold prices have bounced back to levels where some miners can actually sell the stuff for a profit. That’s why the SPDR Gold Shares (GLD[1]) rebound of nearly 9% since June 26 has been accompanied by an outsized gain of 24% from the Market Vectors Gold Miners ETF (GDX[2]).

The bad news is that not all gold miners can turn a measurable profit with gold trading at $1,333 per ounce.

This scenario presents a challenge to investors who insist on having some exposure to gold miners. When gold was trading near $2,000, nearly every miner could turn a profit … even ones that didn’t manage expenses. At the other end of the spectrum, when gold was trading at less than $1,200 per ounce just a month ago, it was unlikely any miners were going to be profitable. With the modest (and possibly temporary) rebound from gold, though, traders need to be particularly picky about which miners they own.

Fortunately, with the new-ish “all-in” cost of mining being used as the yardstick, investors can get a grip on what’s become a game of comparisons.

The Best (and Worst)

Like it or not, the demise of gold prices has forced gold miners to pull back spending at a time when the normal costs have soared. Drilling equipment, gasoline, and the sheer costs to acquire a prospective mine have all magically risen in lock-step with gold’s meteoric rise through late 2011. While the mining companies grumbled about it, when it was all said and done they went ahead and bit the bullet because — hey — rising gold prices would more than offset that spending.

A funny thing happened to those costs when gold prices began to deteriorate in early-2013 though … they didn’t budge. If anything, those ongoing expenses have continued to inch higher even though gold prices have slumped. The average “all-in” amount spent to mine a single ounce of gold now? About $1,200[3], which is right around where gold has been trading.

(Almost) needless to say, miners have been caught in the middle. Many of them have been forced to take huge losses on equally huge write-downs to adjust for the plunge in gold’s value. Newmont Mining (NEM[4]), for instance, turned a 10-cent-per-share loss into a $4.06-per-share loss in Q2 to reflect waning gold prices.

Write-downs or not, all eyes have been laser-focused on how much these miners have to spend to keep mining, and how much they can cut from their spending plans; some have much more room than others to do it. Translation: The definition of a “good gold mining stock” has almost entirely become a matter of expense control.

With that in mind, here are the top three gold major mining names in terms of the lowest all-in costs as of the first quarter; each could be a superior investment choice because of their well-contained expenses.

Company TICKER All-In Cash Cost/Ounce
Yamana Gold AUY $856
Barrick Gold ABX $919
Kinross Gold KGC $1,038

It should be noted that while numerically, Yamana looks the healthiest[5], cash flow has lately been a sore spot for the company. Still, plenty of other miners would love to “only” be dealing with Yamana’s fairly new challenges.

At the bottom of the pile, you’ll find a couple of major players are still forced to spend far too much to keep digging gold up. At an all-in cost of $1,290 per ounce, Gold Fields (GFI[6]) is still feeling the heat[7]. And, though the company did a tremendous job of cutting costs last quarter, Iamgold (IAG[8]) still anticipates spending between $1,200 and $1,300 per ounce[9] to mine gold the rest of the year. Both are operating at paper-thin margins as it is, and neither has any wiggle room to handle a price-pullback.

The numbers are what they are, and though they all might vary a little going forward — for better or worse — it’s unlikely they’ll vary enough in the foreseeable future to become game-changing for any of these outfits.

The Last Word

Although most traders innately know this, it bears repeating … just because gold prices are firming up now doesn’t mean they’ll stay that way indefinitely. Indeed, now that prices have broken under the key $1,200 level once, it becomes much easier to break under (and perhaps stay under) that line in the foreseeable future.

But what about all the write-downs that have been killing the miners since last quarter? As painful as they’ve been, they’re also history at this point, and already baked into most of these stocks’ price levels.

That said, for traders still insistent on gold-mining ETF exposure, this is a case where the GDX — made up of the industry’s biggest names — is the smart way to go. The alternative Market Vectors Junior Gold Miners ETF (GDXJ[10]) is almost entirely made up of companies that lack the size and scale to make a go of it in a weak gold environment, and that’s assuming they’re even operational.

The bottom line: Choose carefully, ’cause proverbially speaking, the men are still being separated from the boys. And the $1,200 cost level seems to be the line in the sand.

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

  1. GLD:
  2. GDX:
  3. About $1,200:
  4. NEM:
  5. Yamana looks the healthiest:
  6. GFI:
  7. still feeling the heat:
  8. IAG:
  9. between $1,200 and $1,300 per ounce:
  10. GDXJ:

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