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Gold Mining Stocks In Trouble


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gold barsGold Mining Stocks In Trouble

Gold mining stocks are in a tumble. For the better part of the past decade, gold mining shares have been underperforming gold itself as well as other mining sectors. The major driving factor has been rising cost of production, combined with the recent decline in gold prices. Another factor at play is the availability of gold ETF’s, which has opened up gold availability to more investors. With such easy access to gold, producers are selling directly much less often.

Gold Market

The gold market traditionally functions as a hedge for investors during times of general market volatility. Rising stock prices in other sectors are helping to move investors away from gold and toward more traditional investments. Additionally, the Federal Reserve has mentioned that it may turn back its quantitative easing which if true would help to bolster the US dollar and investments made in that currency. Investors usually flock to gold as a safe haven when the dollar is weakening and during periods of high inflation..

Market Price for Gold Drops

Gold prices are at a 3-year low, down nearly 30% in the first half of the year alone. It started the year at $1675.92/oz and ended the first half of the year at $1234.53/oz, having traded even lower days before. Many retail investors now have a bearish outlook on the near future for gold after its historic decade-long bull market.

Gold Mining Stocks Plummet

We pulled a selection of gold mining companies to look at their abysmal performance over the past year:


Goldcorp Inc. (GG) 20.20B Market Cap
All Time High April 29, 2011 $55.83

  • Sept. 21, 2012 $46.93
  • July 3, 2013 $24.88
  • -46.98% Since September 21, 2012

Barrick Gold Corp. (ABX) 14.71B Market Cap
All Time High April 21, 2011 $55.63

  • Sept. 21, 2012 $42.86
  • July 3, 2013 $14.69
  • -65.73% Since September 21, 2012

Yamana Gold Inc (AUY) 7.32B Market Cap
All Time High November 8, 2012 $20.39

  • Nov. 8, 2012 $20.39
  • July 3, 2013 $9.73
  • -52.28% Since November 8, 2012

AngloGold Ashanti Ltd. (AU) 5.36B Market Cap
All Time High January 31, 2006 $61.18

  • Sept. 18, 2012 $36.91
  • July 3, 2013 $13.87
  • -62.42% Since September 18, 2012

Newmont Mining Corp (NEM) 14.43B Market Cap
All Time High November 8, 2011 $72.13

  • Sept. 14, 2012 $57.20
  • July 3, 2013 $29.02
  • -49.27% Since September 14, 2012

 

Newmont Mining Corp (NEM)

To see why revenues and operating income of gold mining companies has fallen the past quarter we compared production volumes, cost of production and price of gold bullion for the quarters ending March 31, 2013 and March 31, 2012.
March 31, 2013

  • Consolidated gold production of 1,281,000 ounces (1,165,000 attributable ounces) at Costs applicable to sales of $758 per ounce
  • Average realized gold and copper price of $1,631 per ounce and $3.13 per pound
  • Sales of $2,177
  • Gold and copper operating margin (see “Non-GAAP Financial Measures” on page 53) of $873 per ounce and $0.94 per pound, respectively

 

March 31, 2012

  • Attributable gold and copper production of 1.3 million ounces and 35 million pounds, down 2% and 35%, respectively, from the prior year quarter
  • Average realized gold and copper price of $1,684 per ounce and $ 4.01 per pound, up 22% and no change, respectively, from the prior year quarter
  • Consolidated revenue of $2,683, an increase of 9% from the prior year quarter
  • Gold and copper Costs applicable to sales of $620 per ounce and $1.98 per pound, up 11% and up 78%, respectively, from the prior year quarter

*Data taken from Edgar Online

Looking at Newmont Mining Corp’s (NEM) costs of production and sales per ounce of gold for the 3 months ending March 31, 2013 and March 31, 2012; it’s pretty clear why the stock has fallen so sharply. Overall cost per ounce of gold has risen to $758USD/oz from $620USD/oz. This has caused a decrease in operating margin per ounce of gold to $873USD/oz from $1,064USD/oz. Overall production has remained mostly unchanged during this period, reducing slightly to 1.28 million ounces from 1.3 million ounces.

If we take a peek a little further into today’s numbers, gold bullion has dropped significantly since the March 31, 2013 reporting date. The average realized price of gold for the company was $1,631USD/oz for the first quarter. As of July 4, 2013 the price of gold bullion is at $1,254.18USD/oz. If the company managed to keep its cost at the same rate of $758 per ounce of gold its operating margin per ounce would be significantly reduced. The company sells its gold at a spot market price. However, it’s impossible to predict the average price it sold gold for during its most recent period. Still, with gold bullion dropping so significantly the company will experience a big decrease in operating margin per ounce of gold produced. It’s important to note that NEM does not guard against risk for the fluctuation in the price of gold. With market prices continuing to plummet the operating margin per ounce of gold will continue to decrease as well as increasing costs to produce an ounce of gold.

Why Gold Mining Companies are in Trouble

As the economy begins to improve investors are fleeing from “safe-haven” investments such as gold, silver, copper, and other precious metals. The latest news from Ben Bernanke is unemployment rates improved better than expected for the previous quarter. Unemployment rates are a lagging indicator to the economy’s overall performance for the past few quarters and improving unemployment numbers indicate an upturn in the general economy. The overall success of the stock market over the past few years coupled with great news from unemployment reports and extremely low interest and inflation rates is causing investors to remove their money from safe investments (such as gold) and return their investing activities to the stock market.

Will there be a turnaround?

The question that often gets asked after a commodity (or really any investment instrument) has dropped is “has it hit bottom yet?”. A good amount of attention to the gold mining stocks is being directed by the Chinese government. They have begun to ramp up purchasing and acquisition of troubled mining companies seen as bargain investments. With the above in mind, it cannot be suggested to go in and purchase mining stocks in this environment without some serious research into their financials.

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