SPDR Gold Trust (ETF) (NYSEARCA:GLD), the world’s largest gold-backed ETF, allows investors to leap into the gold market without the vagaries of the gold futures market. The ETF has seen $1.9 billion in outflows so far in the third quarter. This compares to outflows of $11.5 billion in the second quarter ended June 30, according to data compiled by IndexUniverse. The Feds decision on tapering could determine whether the outflows from gold-backed ETFs will continue or reverse.
Source: IndexUniverse–
If the Fed decides to initiate tapering the stimulus program after the FOMC meeting, physical gold and paper gold prices may fade in the short-term as the U.S dollar and investor confidence in the U.S economy strengthens. If the Fed decides not to start tapering this month, I believe gold prices could rally to $1,500 as soon as October. Higher gold prices would help gold miners recover margins lost from this year’s gold slump. Now, gold miners present investors an opportunity to generate alpha from mining stocks that currently trade below their book value such as Yamana Gold Inc. (USA) (NYSE:AUY) and Kinross Gold Corporation (USA) (NYSE:KGC).
Two gold miners to benefit from a gold rally
Yamana Gold Inc. (USA) (NYSE:AUY) has focused on cost containment programs this year to slash costs of operations to bolster free cash flow and margins per gold ounce. Yamana managed to save $115 million from its aggressive cost-cutting initiatives started in April. All-in sustaining costs (AISC) for the second quarter came in at $950/oz, down from $1,014/oz six months ago. The company expects higher production levels and lower AISC in the second half of 2013 that will reflect the new cost structure.
For the next six months, Yamana Gold Inc. (USA) (NYSE:AUY) will have three new working mines — Ernesto/Pau-a-Pique, C1 and Pilar — which look to further boost production levels. Yamana expects gold production levels to grow 30% more than six months ago and 13% more than a year earlier. Lower costs and higher production levels will strengthen cash flows and margins for the company amid a higher gold price environment.
Kinross Gold Corporation (USA) (NYSE:KGC) also has searched for solutions to curb rising operating costs to protect profits and cash flows if gold prices drop once again. Kinross reported a $2.48 billion writedown in its second quarter results because of lagging gold prices. This represents its third impairment charge in a year and half. Kinross’s impairment charges now total $8 billion.
Management reduced the company’s annual capital expenditures forecast to $1.45 billion from $1.6 billion, saving $180 million from its cost restructuring initiatives. Cancellation of its upcoming semi-annual dividend payment to its shareholders will save $182 million per year. Kinross Gold Corporation (USA) (NYSE:KGC) expects to produce gold at an AISC of $1,000 to $1,200/oz this year.
Both companies recognize that cutting budgets and conserving cash will add strength to their liquidity. As mentioned in an earlier article, gold miners have been conservative with deploying their cash into new projects. Miners have avoided taking on the risk of investing in projects that may not yield sufficient cash flows or profits at current gold prices. Balance sheets have improved from preserving cash, better positioning gold miners when they seek to expand their operations in a richer gold environment.
