Gold mine economics for companies like Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Newmont Mining Corporation (NEM), and Kinross (KGC) depend on many controllable and uncontrollable factors. We’ll discuss some of the controllable factors over this article and the next article in this series.
High-quality deposits with high mine-life
High-quality assets mean higher-grade reserves with good mine-life. Higher grades mean more gold per ton of ore mined, which lowers the cost per unit of mining.
On the other hand, if the reserves and mine life are high, the company wouldn’t have to search for alternative mines to replace the depleted mines as quickly, thus saving on capital and development costs.
Management’s execution track record
Management’s execution track record is very important too. Investors generally base their assumptions on management’s guidance about production, cash costs, et cetera. It’s important to see how many times management is right as far as its guidance and actual results are concerned.
If management has met its guidance more often than not, then it’s probably worth your money. But there are some non-controllable and non-foreseeable factors, like labor strike, mine flooding, or earthquakes, which management has no control over. You need to give the company a concession for any guidance miss owing to these factors.
Strategy is a very important factor, as it decides the scale of operation, mining, and processing techniques used and mine lifespan. This is because it’s management that decides whether or not to invest in exploration ahead of production. Which cut-off grade (the lowest grade of ore that’s economically feasible to extract) do they select?
For example, in a low gold price scenario like now, it’s up to management’s discretion whether to go for high-grading (mining only the high-grade part of the reserves and leaving the low-grade part alone), which in turn will impact the cash costs per unit, mine life, gold output, and future economics of the mine. The residual low-grade reserve will become economical only at very high gold prices.
Gold-backed ETFs like the SPDR Gold Trust (GLD) are also a good way to get exposure to gold.
In the next part of this series, we’ll discuss some additional factors to look for in gold stocks.