Should You Tip Your Cash into Gold Mining Stocks?
‘Nobody grows up wanting to be a gold analyst,’ said a friend to me recently.
And that’s the truth. I most certainty did not.
Through my early teenage years, I swung between wanting to be an astronomer, a journalist, and a helicopter pilot.
In spite of good grades in maths, I didn’t quite have the savant gift required for physics. So that ruled out any employment at NASA.
And at five feet and four inches, my lack of height meant I wouldn’t get a gig as an army helicopter pilot (that, and my insubordination meant I probably wouldn’t have lasted long anyway).
At no point did I ever think I’d be here, writing and talking about gold.
My understanding of the gold market grew through morning chats with my old man over badly made Nescafé coffee in the last few years of high school.
I had no idea I could make a job out of it…
Less than a decade on from those chats, I was working for a derivatives trading firm, watching the gold price skyrocket as the financial crisis unravelled.
Funny how things turn out…
Gold mining giants
Yesterday, I showed you how gold exchange traded funds (ETFs) have performed compared to the Aussie dollar gold price.
But there was a second part of the question I didn’t get a chance to answer, and that was about individual stocks compared to the gold price.
Believe it or not, there’s not one right answer. And the gains you make from gold stocks can differ wildly.
There are over 200 gold companies listed on the Australian Securities Exchange (ASX). Even more if you include the companies with less than 50% of their assets in gold.
But not all gold miners are created equal.
Let me show you what I mean.
This chart shows five of the top five gold producers in Australia.
Aussie dollar gold price versus major Aussie gold miners
Source: Trading View
The blue line is the Aussie dollar price of gold.
As you can see, both Newcrest Mining Ltd [ASX:NCM] (orange line) and Northern Star Resources Ltd [ASX:NST] (yellow line) have closely tracked the Aussie dollar price of gold.
Evolution Mining Ltd [ASX:EVN] (black line) and AngloGold Ashanti Ltd [ASX:AGG] (green line), on the other hand, have exceeded the performance of gold.
Why such a difference?
In the case of Northern Star and Evolution mining, they are low-cost gold producers that spending money on exploration.
In other words, not only are both companies earning high margins on the gold they’re selling…they’re also in the process of hunting for more gold to create bigger reserves.
Whereas Newcrest and AngloGold Ashanti are doing what the market expects of the them. Without a takeover bid — or a significant jump in gold deposits — neither company is likely to exceed gains made in the Aussie dollar gold price.
Evolution Mining, however, has the reputation of being one of Australia’s lowest-cost gold producers. The company’s all-in sustaining costs (AISC) sit at $915 per ounce. Meaning, Evolution is making more than $1,000 per ounce in profit for every ounce sold.1
That’s why investors are flocking into Evolution and Northern Star. One miner is trying to get bigger and the other is highly profitable.
Sub billion-dollar gold miners
So, that’s the big boys of the market…what about the little guys?
That is, the companies with a market cap between $300 million and $1 billion.
Some do better than others.
Aussie dollar gold price versus small- to mid-tier Aussie gold miners
Source: Trading View
Take Ramelius Resources Ltd [ASX:RMS] (orange line) and Westgold Resources Ltd [ASX:WGX] (pink line). Both are up about significantly on the Aussie dollar gold price.
Whereas Resolute Mining Ltd [ASX:RSG] (black line) and Aurelia Metals Ltd [ASX:AMI] (green line) are well under the Aussie dollar gold price.
Again, what’s the difference between the two? Simply put, in this section of the market, it comes down to cost and exploration.
Ramelius, Gold Road Resources Ltd [ASX:GOR], and Westgold Resources are exploring and growing the size of their deposits…whereas the other two aren’t.
What the big gold miners and the mid-tier ones have in common is that cash costs count…as well as expanding your resources.
Remember, an ounce of gold out of the ground, is an ounce of gold out of the ground.
Ensuring companies have growing deposits is important right now…
The little guys…
Right at the bottom of the food chain are the explorers.
The tiny little gold stocks where you might blow your money up.
Are these the sorts of companies you want to put you money in?
Some investors have a large appetite for risk. They invest for the thrill of the ride…
Some investors sink money into tiny gold stocks simply for the ‘I found it first’ bragging rights.
Although, let me be clear: This pocket of the market isn’t for everyone. When it comes to microcap stocks — companies under $100 million — there’s every chance you could lose whatever money you invest in them.
Let me show you what I mean…
Aussie dollar gold price versus microcap gold miners
Source: Trading View
Here, we have one company (green line) that has underperformed when compared with the rising Aussie dollar gold price. And two companies that have significantly beaten the gold price rise.
Well, when it comes to microcap stocks, they simply need to find gold to see their share price rally. They don’t even need to dig it out of the ground to excite investors.
The promise of a few nuggets is enough to get a rally going.
The short answer to the reader’s question from yesterday is that it depends on the risk you are willing to take.
When investing in gold mining stocks, remember two crucial things:
Firstly, what is their all-in sustaining cost (AISC)? In other words, how cheaply can they get the stuff out of the ground and into a doré bar?
Secondly, will this company get any bigger through exploration or mergers?
Because the size, and the ability to pour gold cheaply, is what matters when investing in gold companies.
And while I’m bashing on about gold, join me tomorrow.
I’ll show you how most gold companies are getting bigger…and why the price of gold today is irrelevant.
Until next time,
PS: You probably noticed you received your Daily Reckoning Australia earlier than normal today. Well, that’s because I had to be at Melbourne airport at 5am…see this week, is going to be a big gold week in the Daily Reckoning. I’m speaking at a private bullion event tonight…and then again on Friday at the Gold and Alternative Investment Conference on Friday. And in between that I’m planning on interviewing some of the biggest gold experts in the world.