Wednesday, November 3, 2010
"Big Gold" is finally benefiting from big gains in the price of its product.
Back in May, I noted how the world's largest gold mining companies have struggled to increase their profits and share prices... even though gold was in a big bull market.
Vital input costs like fuel, labor, and infrastructure rose just as fast as gold... so shares of most gold producers stagnated from 2006 to 2010.
But as giant gold producer Goldcorp (GG) just showed us, gold's recent climb from $950 an ounce to $1,350 has finally turned on the money machine for miners...
Goldcorp is one of the five largest gold miners in the world and one of its most efficient. Last week, the company reported it made $979 on every ounce of gold produced in the quarter. The profit per ounce is 38% higher than the actual price of gold two years ago. The higher profit translated into a 65% increase in earnings... and allowed the company to increase its small dividend payment.
Over the last two years, the price of gold rose 90%. Input costs for the major gold producers increased a small amount, but their profits soared. Take a look:
Profits may have soared, but the share prices of these companies haven't kept up. Goldcorp's stock is only up 31%. Newmont's up 24%. Barrick climbed a measly 13%.
The table below shows price-to-earnings (P/E) ratios for the big three miners. Back in 2007, investors were willing to pay an enormous amount for these companies. That's not the case today...
Investors don't seem to be on the gold bandwagon yet. It's clear from these numbers they are still wary of Big Gold's profits... as if the price of gold will evaporate back to $700 per ounce overnight.
After the last two years of stagnant shares, the reality of the mining companies' newfound profits hasn't sunk into the general market yet. We're in the throes of one of the greatest gold bull markets in history... Yet shares of these companies haven't grown in step.
The profits are piling up at the major gold miners. That's great for shareholders. At some point, investors will buy them in droves. (At the same time, it's great for junior mining companies. Cash-rich majors will continue to acquire new projects.)
If you haven't taken a position in big gold miners, you're not too late.
Despite soaring gold prices, investors must remember to do their homework before leaping in. "To protect your investment," Matt says, "you need to find the best-run companies with the best chances of developing a mine from their discoveries." Learn about Matt's safe strategy here: One Simple Strategy for 3,000% Gains.
The world's hottest spot for new gold mines is also the "scariest" spot for most investors. But if you just "leave your fear bias at home," Matt says, "you can find some excellent gold companies there." Read on here: How to Buy Elite Gold Miners at a 50% Discount.
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