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The Hard Numbers on Gold Stocks

By Matt Badiali, editor, S&A Resource Report
Wednesday, June 26, 2013

In the last 18 months, $17 billion went to money heaven.
 
That's how much money gold miners "wrote off." In other words, these companies paid too much for assets... They're just now being forced to admit it.
 
It's like superinvestor Warren Buffett once said: "It's only when the tide goes out that you learn who's been swimming naked."
 
The "tide" in gold prices is out. It's fallen from $1,900 per ounce to less than $1,300. So that $17 billion was just the beginning... Gold producers spent $195 billion on acquisitions over the last decade. And some of the world's biggest gold miners are in trouble.
 
From 2001 to 2011, gold prices went almost straight up from less than $300 an ounce to $1,900. Endlessly increasing prices meant there was no accountability. Overspend on a project by a billion dollars? No problem... The price of gold just rose by another $100 per ounce. That makes the project worth another $2 billion!
 
Now the party is over. The price of gold is down 32% from its high. But the costs to mine gold – oil, equipment, labor, etc. – haven't fallen. Projects that looked great when gold was over $1,800 per ounce are worth a whole lot less today.
 
Here's a quick table that shows some of the big gold miners' profit margins in 2012, when gold was going for an average $1,650 an ounce. Compare that to what they're going to earn with gold at today's price (about $1,275).
 
Gold Stock Operating Margins
Company
In 2012 
At Current Gold Price
Fall In Profit Margin
Newmont
26%
3%
-86%
Goldcorp
52%
38%
-28%
Barrick Gold
44%
27%
-39%
Kinross Gold
30%
11%
-65%
Newcrest
48%
35%
-27%
Data from Bloomberg.
 
As you can see, these companies are set to see their profits plummet. And plummeting profits lead to plummeting share prices.
 
For an extreme example, look at Australia's largest gold miner, the $6.8 billion Newcrest Mining. Newcrest had six producing operations, three of which are not profitable at the current gold price. And earlier this month, the company announced that it would write off $5.75 billion.
 
Newcrest's write-down is one of the largest in the history of the industry. Since the start of the month, shares are down more than 40%.
 
I expect more of these announcements in 2013...
 
If you take another look at the table, you'll see Denver-based Newmont is particularly vulnerable. We could see the company announce some mine closures before too long.
 
Newmont and its peers will try to cut costs first. They will slash exploration and development budgets. They will announce layoffs... Giant gold miner Barrick Gold already announced it will lay off 33% of its corporate staff (100 employees) in addition to the 100-some workers it laid off earlier this month.
 
But cutting costs won't be enough. Projects are going to be dumped. Assets will be written off. Gold miners' books are loaded with assets that no longer have any value. And the tide is out.
 
Good investing,
 
Matt Badiali




Further Reading:

We've detailed many times how natural-resource industries are among the market's biggest "boom and bust" assets. And Matt is predicting a boom in a resource you've likely never considered...
 
"Demand for this metal outstripped supply by more than 10% last year... and is set to do it again this year," he says. Get all the details here.

In The Daily Crux
Market Notes
Interest rates are in an uptrend... 30-year rates are sitting at their highest levels in nearly two years.
 
U.S. banks are holding up... big bank fund KBE is sitting less than 3% off a new three-year high.
 
Japan's Nikkei Index is the best-performing major market so far in 2013... up 25% despite a recent pullback.
 
China downtrend continues... big China stock fund FXI breaks out to a fresh 18-month low.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1587.35 +0.9% +20.8%
Oil (USO) 33.78 +0.4% +13.4%
Gold (GLD) 123.33 -0.5% -19.8%
Silver (SLV) 18.92 -0.3% -29.2%
U.S. Dollar 82.54 +0.1% +0.1%
Euro 1.31 -0.1% +4.8%
Volatility (^VIX) 18.26 -9.2% -10.4%
Gold Stocks (^HUI) 219.84 -0.6% -49.1%
10-Year Yield 2.58 +1.2% +60.3%

World ETFs
Symbol Price
Change
52-Wk
Israel (ISL) 14.47 -1.0% +21.4%
Japan (EWJ) 10.94 +1.1% +24.0%
USA (SPY) 158.60 +1.0% +23.5%
Singapore (EWS) 12.80 +2.9% +12.5%
Taiwan (EWT) 12.90 +2.5% +12.4%
India (IFN) 18.50 +1.2% +7.6%
Canada (EWC) 26.11 +0.8% +6.2%
Russia (TRF) 13.26 +0.2% +2.0%
China (FXI) 31.59 -1.1% -0.5%
S. Korea (EWY) 50.94 +1.6% -1.5%
Lat.America (ILF) 35.09 -0.1% -9.9%
S. Africa (EZA) 54.90 +1.4% -10.6%

Sector ETFs
Symbol Price
Change
52-Wk
Media (PBS) 20.48 +0.5% +46.4%
Construction (PKB) 18.69 +1.6% +47.2%
Defense (PPA) 24.02 -0.2% +34.0%
Financials (IYF) 70.43 +1.8% +34.4%
Health Care (IYH) 99.39 +0.5% +30.5%
Consumer Svcs (IYC) 100.68 +0.7% +29.2%
Industrials (IYJ) 82.33 +1.1% +28.4%
Retail (PMR) 29.89 +0.7% +27.0%
Biotech (PBE) 28.14 -0.3% +24.3%
Water (PHO) 21.61 +1.4% +25.5%
Transportation (IYT) 108.80 +1.7% +22.8%
Insurance (PIC) 19.01 +0.1% +18.3%
Telecom (IYZ) 25.32 +1.7% +18.4%
Alt. Energy (PBW) 5.09 +1.8% +19.3%
Software (PSJ) 29.01 +0.1% +14.2%
Big Tech (QQQQ) 70.11 +0.5% +14.4%
Basic Mat (IYM) 67.77 +0.9% +10.9%
Semis (PSI) 15.62 +1.6% +13.2%
Nanotech (PXN) 6.61 -0.9% +7.8%
Real Estate (IYR) 64.92 +1.4% +8.9%
Utilities (XLU) 36.94 +1.2% +6.3%

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