Important things to look out for when you invest in gold stocks


Sep. 26 2014, Updated 1:00 p.m. ET

High production rates

Companies with high reserves and high recovery rates produce at higher rates. Investors should look out for these companies. This has implications beyond just volumes, as we’ll discuss in the next part of this series.

Usually, companies with high production concentrated in smaller areas have the lowest costs. The chart below shows the cost curve for gold miners. As is quite clear, generally, the mines with higher production (wider) are the ones on the left-most side (lower costs), apart from mines which have very high grades.

Economies of scale

Since high production and production growth lead to economies of scale, which means fixed costs remaining the same irrespective of the units produced, as production increases, the costs get distributed among the higher units. This brings the cost per unit down.

That’s generally why majors—the companies with large production bases—are usually the lowest cash producers. So investors should look out for producers that have high economies of scale.

Low operating costs

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Though lower operating costs and high quality of assets generally correlate, there are other company-specific factors that determine operating costs. Consider the geographical area where the companies’ mines are located, its connectivity to the infrastructure, et cetera. Gold prices being the same for all players, the companies with the lowest costs would benefit the most in any given price scenario.

The above chart shows the cost curve for gold miners. The ones on the left-hand side have lower costs compared to the ones on the right-hand side. The width of the bar depicts the volume of production. Those mines producing at above the spot gold price are unprofitable and can’t continue for long if the current price situation prevails.

Comparing gold stocks like Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Newmont Mining Corporation (NEM), Agnico Eagle Mines (AEM), and Yamana Gold (AUY) across these factors should lead to insightful details. Gold-backed ETFs like SPDR Gold Trust (GLD) are also a good way to get exposure to gold.


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