I have long been fascinated by gold and gold mining company investment.
I found this Oxford Economics report commissioned by the World Gold Council in 2011 particularly useful as it showed that gold (page 6) is an asset class that not only retains but increase its real (after inflation) price over time. Later on in the report (page 33) the authors show that there is a positive impact of gold ownership on portfolios owning stocks, bonds and property under different scenarios. These are the sort of characteristics that I am looking for to help build longer-term wealth in my portfolios.
Now, of course, you could buy one of the many Gold ETF products in the market place. However, I am a stockpicker and the weak performance of individual gold shares makes me want to look in this area.
The good news from the Goldcorp Inc. (USA) (NYSE:GG) numbers is that they reiterated their production hopes and have plans to materially increase production of gold over time from the 2013 estimate of 2.55-2.8 million ounces to 4 million ounces by 2017.
The less good news concerned a rise in their 'all-in sustaining cost' (i.e. a measure of what it really costs the company to produce gold) had pushed up to nearly US$1300. With gold prices also currently around US$1300, this gives them a very small profit margin currently.
So why is this? The key is grade, otherwise known as the amount of grams of gold per tonne of earth. It is not a given that high grade correlates with lower costs but it certainly should help on average.
So what I did was to look through the grade statistics in the Goldcorp Q2 report and check out the grade status of the company. The results were that 50% of the company's mines were producing at 3g/tonne or above, while 50% was below 3g/tonne. There is nothing special about this level but with industry norms around 1.5g/tonne (and falling as per this report) I want to try and find gold companies with a better structure.
Now turning to Newmont Mining Corp (NYSE:NEM), they too reiterated their 2013 production hopes although their growth outlook is much more muted than say Goldcorp Inc. (USA) (NYSE:GG)'s. Newmont Mining Corp (NYSE:NEM) looks more like an annuity-style investment (limited growth, dividend focus) and has even linked its dividend (currently just under 3.5%) with the actual gold price. They too have low margins against the current gold price with all-in sustaining costs of US$1279 per ounce.
And what about grade? Well I struggled to find any information from Newmont Mining Corp (NYSE:NEM) on this issue in the release so I went back to their investor day in August last year. Remember Goldcorp Inc. (USA) (NYSE:GG)'s numbers were 50/50 split between above 3g/tonne and below 3g/tonne? Well Newmont Mining Corp (NYSE:NEM)'s equivalent statistics are 12%/88%.
I still feel we can do better than 50/50 though. This took me to look at the numbers from Randgold Resources Ltd. (ADR) (NASDAQ:GOLD).
The company pushed production forward (5% increase H1 '13 versus H1 '12) and doing so at a competitive cost level of an average of $818/ounce during H1 '13, whilst 'all-in' gold production cost is estimated at US$1000/ounce). Medium-term production should break through 1 million ounces next year and be above 1.4 million ounces by 2017. So there is growth and seemingly control of costs too.
So what about grade? My analysis of the recently reported numbers suggests that 80% of Randgold Resources Ltd. (ADR) (NASDAQ:GOLD)'s production is operating at 3g/tonne or above.
So we have ticks in the boxes for production increases, cost control and grade. What is there not to like?
One issues investors have to get comfortable with is the company's asset footprint in Africa where they mine gold. Looking through this presentation is helpful in that regard.