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AuRico Gold Inc (USA) (AUQ), Goldcorp Inc. (USA) (GG): Gold Miners Are Caught in the Margin Vise

The second quarter was terrible for gold miners as gold’s price plunged 23%. That took gold mining stocks down with it as seen in the following chart:

AUQ Chart

AUQ data by YCharts

What’s worse, as these companies were dealing with gold’s sell-off, many were also dealing with higher costs to extract gold. Needless to say, that really hurt profits.

When AuRico Gold Inc (USA) (NYSE:AUQ) announced its preliminary operational results on July 16, the company showed that total cash costs per ounce of gold were up from $635, to $655, quarter over quarter. This pushed the company’s first half total cash costs to $645 an ounce, which is at the top end of its guidance range for the year. With gold prices slipping, rising costs is not something investors enjoy seeing.

One area AuRico Gold Inc (USA) (NYSE:AUQ) investors should monitor moving forward is the progress of the company’s Young-Davidson mine shaft and hoisting system. This project is expected to produce some unit-cost efficiencies. Given that this is the company’s most expensive mine, addressing this in a timely fashion is critical. Last quarter, gold from Young-Davidson cost $716 an ounce, which was well above the company’s guidance of $575-$675 an ounce. Expectations are for this project to be operational in September of this year, which should help to get this mine’s costs better in line with the company’s expectations.

AuRico Gold Inc (USA) (NYSE:AUQ) wasn’t the only miner to see its costs rising. Goldcorp Inc. (USA) (NYSE:GG) saw its cash costs soar to $646 per ounce this past quarter, which is up from just $565 an ounce the prior quarter. The company does see this as temporary, as it reaffirmed guidance of cash costs of $525-$575 an ounce this year. This is an area that investors still need to watch, as rising costs will really cut into its profits if gold prices slump again.

In the near term, one company to watch is Barrick Gold Corporation (USA) (NYSE:ABX). Last quarter, the company reported cash costs of just $561 an ounce, which is well below its guidance of $610-$660 an ounce for the year. It will be interesting to see if the company can maintain below guidance costs or if it, too, will be hit by higher gold costs in the quarter, as well. If the company beats estimates, its likely because it kept costs down.

Last quarter was a rough one for gold investors. Higher costs, when combined with lower realized prices, don’t have a positive effect on a company’s bottom line. That’s why those companies that are able to keep costs down will thrive.

The article Gold Miners Are Caught in the Margin Vise originally appeared on and is written by Matt DiLallo.

Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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