Gold prices are at historically high levels right now, yet many mining companies are moving away from gold-focused mining activity. Copper is the real money maker right now, even if stock markets haven’t yet realised it.
While Freeport managed to produce USD 2.8bn worth of free cash flow for 2009, Barrick, the world’s biggest gold miner, was able to produce a more modest USD 548m, and Newmont, the No 2 gold miner by production, a more impressive USD 1.2bn.
Specialised gold miners are having a tough time of it, and are moving increasingly towards mining base metals, where relevant deposits also contain gold. The favourite is copper porphyries, which tend to be big, and can be mined on a massive scale. Both Barrick and Newmont, among other gold miners, already produce material amounts of copper, with more to come.
There have been multiple examples of miners scrambling for base metals over gold.
Goldcorp, which is building up to full production at its zinc-lead-gold-silver Peñasquito mine in Mexico, is in a battle with Barrick over Chile’s El Morro, which, in the hands of London-listed Xstrata, was classified as a copper-gold deposit.
Given the ongoing move – and even a fight – by gold majors into copper mining, seen also at Australia’s Newcrest, and no doubt at Harmony, which today announced a huge copper-gold resource at Golpu, PNG, held 50:50 by Harmony and Newcrest, the possible fear for gold bugs lies in a potential downgrading of stock market ratings.
Thanks to gold stocks’ recent popularity, Freeport’s looks potentially undervalued on a relative basis, as show by market cap’s vs. cash flow provided in the chart from Mineweb below. Barrick has three year operating cash flow of $6.885 billion dollars with a market value of $38.885 billion. Freeport has a higher three year cash flow of $13.992 billion, but a lower market value than Barrick. Thus mining companies are moving into base metals, but investors haven’t followed yet.
Note: The author does not own shares in any of the companies mentioned, but investors he speaks to may.
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