Finding Bargains Among Gold Miners
Essentially, any investment in a gold miner is a leveraged play on the price of gold bullion. Accordingly, for mining equities to outperform bullion, miners need to generate strong net operational cash flows. In order to do this, they need to generate a solid margin per ounce of gold produced, by keeping production costs low.
This means that initially, investors need to identify those miners with low production costs. These are measured in two ways: total cash cost per ounce, or all-in sustaining cash cost per ounce. The first method only takes into account the direct costs of producing an ounce of gold, whereas the second includes all direct and indirect costs. As a result, the second method is a more accurate assessment of the costs associated with producing an ounce of gold.
A considerable number of the major gold miners – as illustrated by the chart below – have a total all-in sustaining cash cost per ounce in excess of $1,000. As a result, with gold now trading at around $1,343 per ounce, these miners are making a thin margin per ounce produced.
Source data: Each respective company’s Q1 2013 financial reports.
This emphasizes the importance of choosing to invest in gold miners that have a low all-in sustaining cash cost per ounce. The three lowest as illustrated by the chart are Barrick Gold Corporation (USA) (NYSE:ABX), Yamana Gold Inc. (USA) (NYSE:AUY) and Eldorado Gold Corp (USA) (NYSE:EGO). Each of these companies also has solid production and growth prospects, allowing them to take advantage of any rebound in the gold price.
Barrick Gold Corporation (USA) (NYSE:ABX)
Barrick Gold Corporation (USA) (NYSE:ABX) is the world’s largest gold miner, offering investors a combination of geographically diversified mine assets, economies of scale, and a promising exploration program. Of late, it has been dogged by a range of project development issues, in particular regarding its Pascua-Lama mine on the Chilean and Argentine border.
Barrick Gold Corporation (USA) (NYSE:ABX) has already invested around $5 billion in the development of the mine, but has been stymied by Chile’s environmental regulator, which recently stopped construction and imposed sanctions over environmental concerns. This has now seen the commencement date of the project delayed from 2014 to 2016, and will more than likely see Barrick Gold Corporation (USA) (NYSE:ABX) forced to write down around $5.5 billion against the value of this asset.
But the sharp decline in Barrick Gold Corporation (USA) (NYSE:ABX)’s share price has seen the company trading at a level well below its fair value. This is highlighted by Barrick Gold Corporation (USA) (NYSE:ABX)’s enterprise value of four times its EBITDA, and its price, which is around four times its operating cash flow per share. All of this makes Barrick appear to be an exceptional value, particularly in comparison to its peers.
