Finally, A Reason To Buy Gold Miners

A strange thing occurred at 2:00 PM Eastern Time on Thursday. While the price of the SPDR Gold Shares ETF (GLD) continued its free-fall, curiously the price of the Gold Miners ETF (GDX) jumped on high volume, adding 2.5% for the day.

My first reaction was that the abnormal divergence between the spot cost of the metal from the price of miners’ shares must be due to some kind of quarter-end portfolio rebalancing. Upon further review of the day’s news, I think the miners’ revival may be the result of another impetus, which may continue to contribute support to miner stocks.

As the market opened, it appeared that gold was due for a “dead cat bounce” from drastic losses earlier in the week, and the Miners rebounded with the metal. However, by 1:00 PM, GLD had given back the gains and the miners were pulling back as would be expected. Near 2:00 PM a story was circulating on the newswire that the World Gold Council had issued new guidelines for analyzing gold mining companies. The WGC distributed “a Guidance Note on ‘all-in sustaining costs’ and ‘all-in costs’ metrics, which gold mining companies can use to report their costs as part of their overall reporting disclosure. The World Gold Council has worked closely with its member companies to develop these non-GAAP measures which are intended to provide further transparency into the costs associated with producing gold.”

In order to understand the significance of this news, we should revisit the Mark Twain assessment of the industry: a gold mine is a hole in the ground with a liar standing next to it. Too many investors have been burned by gold miners’ claims, and distrust keeps many others away from legitimate mine operators.

In order to prevent deceptive representation of a miner’s potential for profitability, the US Geological Survey, SEC and Canadian authorities have created strict reporting requirements. Categorization of a mine’s resources must meet certain requirements, and a more complete explanation of this may be reviewed in our SA article, Beware The Trap Door Under Miner’s Silver Reserves. Despite all the attempts at clarification, most investors have little faculty for understanding exactly what miners mean when they tout, “our production costs are below $400.” It is frustrating and difficult to understand why a miner cannot earn more profits with the spot price three or four times the production cost.

The problem is that the “operating cost” or “production cost” only factors in a small portion of the miners’ expenses, excluding things like corporate G&A, amortization, reclamation, some exploration and capital expenses, etc. A better measure is the WGC’s “sustaining cost,” which is the actual cost to sustain the operation, including all the above and other costs. The sustaining cost for most miners exceeds $1000 per ounce, including all the costs incurred by the company.

We think this news proved positive for miners’ stocks for the following reasons:

  • The guidelines define an acceptable alternate to GAAP accounting that is consistent in the industry.
  • They more realistically allow the comparison between the spot price and the company costs, and its relationship to profits.
  • They bring to the investing public the realization that the spot price of gold cannot fall to triple digits without drastically affecting supply.
  • They enable legitimately efficient companies to differentiate themselves from miners that promote their prospects with partial information.

The definition of “all-in costs” and “sustaining costs” can be found in the WGC guidance memo.

Although the “sustaining costs” have not been published for most miners, we added a calculation from the Alamos Gold investor presentation in the following table we sent to clients recently:

AGI $ 812 1.7% 1.9 No Debt/Buybck
EGO $ 928 2.2% 2.1 China/Political
AUY $ 945 2.7% 2.1 Debt/Political
ABX $ 1,120 4.3% 2.2 High Debt
CAGDF $ 1,126 4.5% 4.0 Asia/Political
NEM $ 1,129 4.7% 2.6 Debt/Divvy Inc.
GG $ 1,168 2.4% 2.2 Moderate Debt
AEM $ 1,245 3.3% 2.6 High Debt
IAG $ 1,257 5.7% 2.7 Debt/Low Rating
FCX UNKNOWN 4.4% 2.2 Diversified

It is clear why Alamos Gold chose to highlight this metric in its presentation. In addition to low sustaining costs, we prefer mining companies to have some dividend yield, a moderate debt level and low political risk. As a comparison, the table also includes the current YAHOO analyst consensus number (lower is better).

Alamos Gold is the clear winner in the cost category, and the debt free balance sheet offers strong support for growing dividends even if the spot price drops. The dividend is lowest among these ten, but the company recently announced a share buyback program. In the recent earnings report, the company explained its intent to continue exploration and development of its properties, and these are initiatives that can readily be cut back if the gold drop becomes worse.

Yamana Gold is also attractive in this comparison with very low costs. Debt is also moderate, but some important properties are in politically-unpredictable Argentina. AUY has sold off more severely than most, so it may benefit from a bounce.

We also think that Newmont Mining and Goldcorp, Inc. should be on the watch list for bottom fishers.


We had considered $1246 per ounce as the support level for gold, although that appears too optimistic. That is the level in September 2010 when the price of gold exploded up, creating a gap-like phenomenon that had to be backfilled. It also is a point where some miners must evaluate how to sustain their operations, possibly to shut-in mines or slow production. This eventually will support the price of gold, although the immediate bearishness requires caution. However, if investors understand that the price of gold cannot continue indefinitely below its production price, miners like Alamos, Yamana and Goldcorp may justify a long-term investment. With the new reporting options from the World Gold Council, these stocks will be able to differentiate themselves from the crowd going forward.


Are Gold Miner Dividends Sustainable?

Although the gold price has proved volatile in recent months, many gold miners continue to offer investors an attractive dividend. But is it sustainable?

For investors looking for a dividend from the large cap gold miners, the last decade and a half has proved fruitful. Frank Holmes, CEO and chief investment officer of US Global Investors, recently noted that the world’s top 20 gold companies have increased their dividends at a compound annual growth rate of 16% over the last 15 years, while gold only rose 12% annually over the same period.

At the moment, Barrick Gold’s (NYSE:ABX) dividend yield is 3.90%, while Goldcorp’s (NYSE:GG) dividend yield is 2.07%, Newmont Mining Corp.’s (NYSE:NEM) dividend yield is 4.09%, and Kinross’s (NYSE:KGC) dividend yield is 2.48%.

The miners themselves were optimistic about dividends heading into this year. According to PwC’s 2013 global gold price report, 100% of senior miners surveyed planned to use cash to continue to pay dividends this year, with 80% saying that they planned to increase the proportion of profits paid as a dividend.

Indeed, speaking about the climate for M&A in the gold space at the Bloomberg Canada Economic Summit last month, Barrick Gold president and chief executive officer Jamie Sokalsky said that investors are hoping for free cash flow, which he said they would perhaps rather see “returned to them in a higher dividend at some point.”

All else being equal, dividends from the gold miners do help mining equities look more attractive to gold ETFs, explains Elizabeth Collins, director, basic materials equity research at Morningstar.

“But unfortunately for gold mining equities, gold ETFs provide leverage to gold prices without the added headaches of cost inflation, production level disappointments, and political risk,” she adds.

This week, Australia’s Newcrest Mining (ASX:NCM) announced that, as a result of a reduction in profitability for the 2013 financial year following a sharp decline in the gold price, it expects that it will not pay shareholders a final dividend.

The company notes that as growth in production and earnings continues from two of its mines over the coming years, and costs and capital expenditures are reduced further, it “is confident it will be well-positioned for both an accelerated reduction in debt levels and a return to dividend payments.”

Back in April, Newmont Mining — which uses a gold price-linked dividend policy, with each quarterly dividend based on the company’s average realized gold price for the preceding quarter — cut its dividend to $.35 per share, based on the average London PM Fix of $1,632 per ounce for the first quarter of 2013. In February, the company’s quarterly dividend was 42.5 cents per share based on the average gold price of $1,718 per ounce for the fourth quarter.

Certainly, the ability of many miners to continue to pay an attractive dividend depends on the gold price’s moves. Earlier this year, RBC Capital Markets ran a “downside stress test” on North American gold producers, to see how robust miners’ balance sheets are. While the test found that most of the companies appear to be able to weather gold prices of $1,500 or $1,4000 per ounce, at $1,200 per ounce, within 24 months most companies would have to cut capital spending and dividends.

“I think many gold miners’ dividends are sustainable as long as gold prices don’t fall. Many miners are cutting back on exploration and capital expenditures in order to boost free cash flow and return more cash to shareholders. However, many gold miners’ dividend levels are either directly or implicitly linked to gold prices. So if gold prices fall, so too would dividend levels,” says Collins.


Is It Time to Start Freaking Out About the Gold Supply?

You hear a lot about central banks and gold reserves these days.

Back in February, Germany decided to start repatriating some of its U.S.- and Paris-held gold. And in March, Switzerland announced plans to vote to do the same, as well as to stop selling its gold reserves.

Moves like these aren’t necessarily out-of-the-ordinary. After all, if you’re a gold buyer, it’s generally not a good idea to buy and hold it sight unseen.

But many can’t help but wonder whether Germany, Switzerland and potentially other countries doubt perhaps not the purity of the gold bars held in their name, but rather their existence.

While we expect their gold is ready for the taking, it does make you wonder why, in Germany’s case, it will take seven years for the wealth transfer to be complete.

Whatever the reasoning for the timeline, it’s a lesson to us all that the companies storing and selling your bullion should be able to produce your gold upon request.

But let’s suppose the bullion isn’t where it’s supposed to be … and the governments have to go and buy gold on the open market. Will there be enough available?

Well, there’s plenty in the ground. So that may depend on whether several miners can go forward with their plans to get it out. And unfortunately for some big gold projects, miners are finding themselves between a (gold) rock and a hard place …

Last week, Atna Resources (ATNAF) announced that low gold prices have “temporarily downsized” the ramp-up of underground mining operations at its Pinson Mine near Winnemucca, Nevada. Atna’s stock was punished mercilessly.

Pinson was expected to yield 50,000 to 57,000 gold ounces this year. Atna had hoped to increase that production to as much as 200,000 gold ounces annually.

Nope. Not gonna happen. At least, not at these prices.

But the Pinson Mine is small potatoes, right?

On Monday, Mexico’s Minera Frisco (MFRVF), owned by billionaire Carlos Slim, said that production at its gold and silver mine El Coronel was suspended due to “illegal” worker action.

El Coronel produced 42,211 ounces of gold and 4,234 ounces of silver in the first quarter of 2013, and was planning on ramping up production.

A production ramp-up? Nope, not gonna happen now.

But that’s still small potatoes, right?

On Friday, Roque Benavides, chief executive of mining company Buenaventura, talked to Reuters about Conga, the monster, $4.8 billion Peruvian gold project that is being developed by Newmont Mining (NEM). Buenaventura is junior partner on the project.

Protests flared up at Conga again last week. And these aren’t placard-holding hippies singing “Kumbaya.” People have died in clashes with security forces at the Conga project.

The project was suspended in November 2011 at the request of Peru’s central government, after increased protests in Cajamarca by anti-mining activists. Benavides says that those protests, if they continue, could mean the end of the project.

Conga could have an average annual output of 580,000 to 680,000 ounces of gold and 155 million to 235 million pounds of copper during its first five years.

Now THAT’S big potatoes.

On Monday, an Indonesian government official announced that Grasberg, an Indonesian copper mine owned by Freeport-McMoRan Copper and Gold (FCX), will not be able to resume output for three months until a probe into a deadly tunnel collapse is completed.

Grasberg is known as a copper mine — the third-largest in the world, in fact — but it’s also the BIGGEST gold-producing mine in the world, averaging more than 1 million ounces of gold production each year for the past three years.

That’s HUGE potatoes!

Should We Start to Worry
About Gold Supply Now?

The word on the street is that it’s getting tougher and tougher to buy physical gold.

Maybe that’s why people in Singapore were paying a premium of $7 per ounce for physical gold last week — a new record. And if you want to buy physical gold in Singapore in June — too bad! Orders put in now won’t be filled until July.

  • Maybe that’s why the Indian government just raised the import tariff on gold — AGAIN — on Sunday, in desperate bid to clamp down on consumer demand for the yellow metal. And this is happening during an economic slowdown! What’s going to happen when India’s economy starts firing on all cylinders again?
  • Maybe that’s why sales of physical gold are hitting “astronomical” levels in Dubai. Expat Indians are rushing to buy gold in Dubai and ship it home, perhaps in a bid to get around India’s onerous new gold-import restrictions. Dubai merchants report that their sales have shot up by 400% after the recent price plunge.
  • Maybe that’s also why sales of American Eagle gold bullion coins by the U.S. Mint — despite dropping in May from April — are still on track to set a new annual sales record.

The buyers are there. The suppliers are getting thinned out. The question of the day may soon become: “Got physical gold?”

What’s your answer going to be?

Got Gold (Miners)?

Miners look good too, of course — at least, the good ones do. That’s why I recommended two new gold miners to my Junior Resource Millionaire subscribers on Friday. Are those positions up? Yup! Are they likely to go higher? Hey, nothing’s certain in this world, but I think the odds favor this trade.

And let’s look at the Market Vectors Gold Miners ETF (GDX), a basket of leading gold miners.

Despite recent bad news from Newmont and Barrick Gold (ABX), which is having its own troubles with a multibillion-dollar project, the gold miners seem to be breaking out. Maybe it’s because the gold they do own is suddenly looking a lot more valuable.

The real test will come at the 50-day moving average. Good luck to all.

If you’re doing this on your own, do your own due diligence.

All the best,

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