How Cheap Is Dirt-Cheap for Gold Miners?

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How Cheap Is Dirt-Cheap for Gold Miners?

Sean Brodrick | April 26, 2012
Video Transcript 

Hi, this is Sean Brodrick for Uncommon Wisdom Daily. Gold prices aren’t that far off record highs, but the mining sector has been hammered flat. There are a few reasons for the drop — including project delays, declining ore grades, political instability in some resource-rich parts of the world, and a general move away from assets seen as risky, thanks to the sovereign-debt crisis in Europe. But the biggest force behind the decline is higher costs, which equals lower profit margins. In the third quarter of last year, it cost miners an average of $628 to produce one ounce of gold. And the total cost, including management, marketing and so on, was more like $1,250 an ounce. Both of those numbers are much higher than they were in 2010. But even taking those higher costs into consideration, the hammering that many miners are taking seems out of proportion. For example, take a look at Newmont Mining, the world’s biggest gold producer. (Updated Chart) The bottom of the chart shows the stock price relative to the price of gold, which is the lowest it’s ever been. Above that, you can see that Newmont is testing the 50% retracement line, halfway between its bottom in the financial crisis of 2008, and its top hit last November. Fifty-percent retracements often act as support levels, meaning the stock could rally higher from here. But I’m not buying Newmont yet — not until I see the tone of the market improve. Meanwhile, as much as the majors have suffered, the junior miners are feeling double the pain. And as for explorers and developers that don’t have mines in production yet — well, they’re being dumped in a ditch. There are even explorers trading for less than their cash and equivalents — in other words, dirt-cheap. Even so, I think they have room to move lower still. The problem with the junior developers is a general perception that their business model is broken. Many of these companies plan on selling to larger firms after they prove up a deposit. But big mining companies currently have full project pipelines, with no need for new acquisitions. The upshot is that there are now a bunch of great companies out there that you can pick up for pennies on the dollar. I’m not buying yet, but I have my eye on several attractive names, and I may go shopping soon. I recommend you do the same. We may be coming to a once-in-a-decade buying opportunity, and when it’s time to act, you’ll want to move fast. I’m Sean Brodrick for Uncommon Wisdom Daily. Thanks for watching.