To begin, the easily recoverable gold deposits here on our planet have largely been discovered. This has led to exploration and development of costlier, more challenging geological deposits. However, the cost problem is not only a result of the natural rise in costs associated with the extraction of minerals from increasingly difficult-to-reach locations. In addition, a great irony exists in the gold stock universe: the very depreciation of the US dollar, which has stoked gold bullion prices over the past several years, has also resulted in price increases in key gold production inputs, particularly energy.
These issues can be clearly seen in Barrick Gold’s results. In order to maintain and grow production, capital expenditures at Barrick have increased dramatically in the past decade, rising nearly twentyfold since 2002. They have doubled since 2009. Understandably, this has bought Barrick little; long-term debt has tripled from 2008, yet year-over-year production was down slightly in 2011.
Barrick’s cost trends for gold production also bear out this concern. Total cash costs have risen from the $500 per oz. level in 2011 to near the $600 level at the end of 2012. Barrick is now hedging the price of oil. These facts leave Barrick particularly vulnerable to any fall in spot gold prices.
Even highly regarded Goldcorp Inc. (NYSE:GG) has not been immune to these concerns as their investment and cost levels have risen. Goldcorp’s stock price is essentially flat over the last six years. As noted earlier, for those high-cost South African producers, the market has been particularly cruel. Harmony, Goldfields, and AngloGold have faced the triple whammy of: shouldering the same cost trends as the non-South African producers, total cash cost levels already at or near $1000 per oz., and the added burden of labor strife and domestic policy changes.
Barrick Gold has done many positive things and has produced admirable results. Yet, the market has figured out a way not to fully reward the company’s shares. Gold stock-bulls argue that ABX and the gold stock sector are a buy based on cheap valuations, but market history is peppered with value traps.
Legitimate concerns remain surrounding the behavior of world central banks (see Will Currency Wars Awaken This Sector?) and I fully appreciate that line of reasoning, but arguing with Mr. Market can be a precarious endeavor. As singer/songwriter Tom Petty states in “Free Fallin”, the good girls can be left home with broken hearts. For now, I will sit back and carefully watch the sector.
For more related coverage, continue reading here:
How Many Hedge Funds Have Faith in Barrick Gold?
Why Does This Billionaire Love Gold?
Will Gold Producers Rebound in 2013?
Disclosure: I have no positions in any of the stocks mentioned in this article
