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Get Ready for Big Gold Mining Profits in 2011

By Matt Badiali, editor, S&A Resource Report
Wednesday, January 5, 2011

With gold near $1,400 per ounce, major gold producers are going to make a ton of money in 2011.
 
Some investors will too, but it won't be as easy as you think.
 
Today, I'm going to show you which gold miner we must own in 2011. But before I get there, let me back up...
 
Gold prices are up, which is great for gold miners. But their costs are up, too.
 
To keep it simple, we can think of a gold miner's earnings as the amount it gets from selling gold, minus the amount it has to spend on the electricity, concrete, steel, and diesel fuel it needs to get the gold out of the ground.
 
The prices of electricity, concrete, steel, and diesel fuel are high and rising. The last time we saw these levels was in 2008. Take diesel fuel, for example. This is a major cost for gold miners. It runs everything from the excavators to the dump trucks.
 
In 2008, the average price of a gallon of diesel fuel was $3.80. Right now, it's $3.31 – and we're likely to see it climb over the next few months at least. So using the 2008 price is a reasonable assumption.
 
Below, you'll find a table of three of the biggest and best gold miners. I compared estimated 2010 earnings with what they'll make in 2011 if gold stays at $1,400 per ounce and costs are similar to 2008. Take a look...
 
Gold
producer
Estimated
2010 earnings
Estimated
2011 earnings
Percent change
Goldcorp
$1.4 billion
$2.5 billion
+86%
Newmont
$1.7 billion
$2.0 billion
+20%
Barrick
$2.8 billion
$4.0 billion
+42%
Data from Bloomberg
 
As you can see, there is one clear winner. Goldcorp's net earnings will rise 86% from 2010's estimated net earnings. Barrick Gold's net will rise 42% in that scenario, while Newmont's nudges up 20%.
 
It turns out, Goldcorp is the cheapest among the three as well.
 
Here's another table, which shows you how much you're paying based on last year's earnings... and how much you're paying based on my estimate of their 2011 earnings...
 
Gold
producer
P/E based on
est. 2010 earnings
P/E based on
est. 2011 earnings
Goldcorp
24.2
13.0
Newmont
18.6
15.5
Barrick
19.4
13.7
 
At more than 24 times last year's earnings, Goldcorp may look expensive. But using my numbers for 2011, it's a great deal.
 
There's no guarantee gold will remain at $1,400. It could sink to $1,200. It could skyrocket to $1,800. But the big, long-term trend here is up... and if it continues, big gold miners are going to start rolling in profits. And the best deal in "big gold" is Goldcorp.
 
Good investing,
 
Matt Badiali




Further Reading:

Commodities are climbing across the board, which is turning into big gains for the share prices of commodity stocks. "But we'd be foolish to focus only on the potential gains," Matt cautions. "We need to acknowledge that things could get crazy... but we still need to manage our risk." Pick up some tips here: The Key to Investing in Commodities in 2011.
 
There is a potential bomb hidden in the energy sector. But Matt has discovered an early warning system. Don't miss his essay here: If You're an Energy Investor, You Must Watch These Stocks.

In The Daily Crux
Market Notes
Natural gas rockets to its highest level in over four months.
 
BP shares jump to seven-month high… up more than 70% from June lows.
 
China coal giant Yanzhou Coal breaks out to fresh all-time high… up more than 25% in three months.
 
Russia fund RSX quietly jumps to new two-year high.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1270.20 -0.1% +12.1%
Oil (USO) 38.08 -2.5% -5.4%
Gold (GLD) 134.75 -2.4% +22.7%
Silver (SLV) 29.08 -3.0% +68.8%
U.S. Dollar 79.20 +0.3% +2.2%
Euro 1.33 -0.4% -7.7%
Volatility (^VIX) 17.38 -1.3% -13.3%
Gold Stocks (^HUI) 551.73 -2.7% +24.0%
10-Year Yield 3.35 +0.3% -12.8%

World ETFs
Symbol Price
Change
52-Wk
USA (SPY) 126.98 -0.1% +12.0%
Canada (EWC) 30.92 -1.1% +14.9%
Russia (TRF) 23.88 +1.7% +21.0%
India (IFN) 34.87 -1.3% +12.1%
Israel (ISL) 17.56 +0.0% +11.6%
Japan (EWJ) 11.02 +0.1% +10.3%
Singapore (EWS) 13.93 -0.1% +18.6%
Taiwan (EWT) 15.61 -0.8% +17.0%
S. Korea (EWY) 61.92 +0.2% +25.5%
S. Africa (EZA) 74.15 -0.9% +27.9%
China (FXI) 44.28 +1.3% +2.6%
Lat.America (ILF) 54.09 -0.5% +9.6%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service (OIH) 137.39 -1.8% +11.3%
Big Pharma (PPH) 65.93 +0.9% -1.7%
Internet (HHH) 73.80 +0.1% +25.6%
Semis (PSI) 16.44 -0.1% +19.7%
Utilities (XLU) 31.64 +0.5% +1.8%
Defense (PPA) 18.85 -0.2% +8.3%
Nanotech (PXN) 9.87 -0.6% -8.3%
Alt. Energy (PBW) 10.62 +0.2% -6.4%
Water (PHO) 18.97 -1.3% +10.2%
Insurance (PIC) 16.58 -0.5% +19.5%
Biotech (PBE) 21.49 -0.7% +27.6%
Retail (PMR) 19.20 -2.1% +20.4%
Software (PSJ) 25.00 -1.3% +17.6%
Big Tech (QQQQ) 55.27 -0.1% +19.1%
Construction (PKB) 12.93 -1.5% +6.7%
Media (PBS) 14.08 -0.4% +18.9%
Consumer Svcs (IYC) 68.04 -0.4% +21.7%
Financials (IYF) 58.38 -0.4% +11.0%
Health Care (IYH) 66.19 +0.2% +2.3%
Industrials (IYJ) 65.73 -0.4% +21.8%
Basic Mat (IYM) 77.65 -0.7% +25.5%
Real Estate (IYR) 55.82 -1.8% +21.9%
Transportation (IYT) 92.76 -0.7% +24.9%
Telecom (IYZ) 23.72 +0.1% +15.4%

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