Gold Weakness Wipes Out Six Months Of Gains At The Miners

Barrick Contrarian Indicator For Gold

There are a lot of gold bulls out there who advocate playing the mining stocks, instead of the metal, arguing that through the miners you’re getting leverage.

That may be true.

But leverage works in reverse.

In this case it works like this: one month of gold declines = six months worth of gains destroyed.

MineWeb, which performed the survey, continues to harp on a big problem at the miners. In the end, they really don’t produce that much cash:

Looking at global Tier I gold diggers – representative groups which have mines of various ages – Newmont is currently priced at US$47.63 a share, a level first recorded in the latter parts of 2003. A similar profile is produced by the NYSE pricing for AngloGold Ashanti. Kinross is now trading at levels it first attained in the latter parts of 2007, as is Barrick, the world’s biggest gold miner by value and output. Goldcorp, a comparatively new name, is trading around levels first notched up during a spike in May 2006.

Leaving aside the issue of forecasting the gold bullion price – forever a mug’s game – there may be increasing concerns that gold miners are simply not producing cash in line with other performance metrics generally presented to investors. Thursday’s blow off in the Agnico Eagle stock price was associated with technical presentations given by the company, which included information that while production would roughly double in 2010 to about 1.05m ounces, costs could rise to nearly USD 400/oz. Agnico Eagle’s cash costs have risen from USD 162/0z to an estimated USD 340/oz for 2009.

All of these numbers are impressive, given the level of gold bullion prices, but the insistence of gold companies blasting out cash costs in a vacuum may be wearing thin. Reference Agnico Eagle’s financial statements and these will show that since 1 January 2007, the group has produced cumulative negative free cash flow of USD 1.5bn, computed by aggregating operating cash flow and cash spent on capital expenditure.

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