A Day in the Life of a Gold Stock Investor: Goldcorp Inc. (GG), Barrick Gold Corporation (ABX), Newmont Mining Corp (NEM)

In light of this how should a gold equities investor proceed? On what factor should current and potential investors focus?  At the risk of being overly obvious and elementary, the answer is the spot price of gold bullion. The efficient use of capital/cost issue is getting more attention from gold company managements, but is realistically unlikely to drive share prices as savings will likely come slowly and, in the end, may only reduced the growth rate in costs. The only factor that can drive shares strongly higher would be a sustained rise in the gold price out of its near two-year consolidation. This is a simple conclusion, but one not without merit.

Take for instance, Kinross. From a revenue point of view, gold mining companies are susceptible to a quick, easy analysis as their largely singular product has clear prices established in a spot market. The case of Kinross is cleaner than that of most other miners, as they focus almost exclusively on gold. Let’s do a simple what-if analysis for Kinross by holding every other financial number constant (ounces of gold sold, taxes, etc) but raising the price of gold 10%.

Kinross reported third quarter 2012 revenue at $1,109 million and earnings per share from continuing operations of $.20 per share.  A 10% rise in the gold price raises revenue to $1220 million, and via the magic of the income statement, our assumption falls to the bottom line cleanly. Earnings per share from continuing operations rise to $.30 per share, a 50% increase. Such a result would likely move the stock strongly higher.

What is the conclusion?

Investment decisions by gold equity investors must be largely based on an assessment of the direction of the gold price. It’s that simple. A breakdown of gold out of its consolidation would be disastrous for gold equities; a breakout will produce obvious gains and make current prices look like screaming bargains.

Disclosure: I have no positions in any of the stocks mentioned above