Tipping your cash into gold mining stocks

Tipping your cash into gold mining stocks
  • Gold mining giants
  • Sub billion-dollar gold miners
  • The little guys…

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 teenager 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 foot four, 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).

It wasn’t until I left high school that I discovered gold. My understanding of the gold market grew through morning chats with my old man over badly made Nescafé coffee.

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 the world around you can shape your views.

Gold mining giants

Last week, I asked you to share your thoughts on the type of content you’d like to see in The Daily Reckoning Australia. Boy, was I surprised by the amount of feedback.

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 10 gold producers in Australia.

Aussie dollar gold price versus major Aussie gold miners
Six-month chart

Source: Bloomberg

The black line is the Aussie dollar price of gold. As you can see, both Newcrest Mining (orange line) and Northern Star Resources (red line) have closely tracked the Aussie dollar price of gold.

Evolution Mining (blue line) and AngloGold Ashanti (green line), on the other hand, have exceeded the performance of gold.

Why such a difference?

In the case of both Norther Star and Newcrest Mining, they are already doing what the market expects of them.

Although it is worth mentioning that Northern Star is expected to announce some exploration results today. 

My point is that these are both large, established gold miners.

While Northern Star did provide investors with an update on its exploration at the Pogo Operations site this morning, the ‘big’ expansion for both companies is over.

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 and AngloGold Ashanti, on the other hand, are beating the Aussie dollar gold price rise for two different reasons.

AngloGold is still exploring for gold. Through joint ventures, it is in the process of identifying some new high-grade gold mines.

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 $838 per ounce (the only Australian gold producer with a lower AISC is Aurelia Metals at $738). Meaning, Evolution is making nearly $1,000 per ounce in profit for every ounce sold.

That’s why investors are flocking into Anglo and Evolution. 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.

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Some do better than others.

Aussie dollar gold price versus small- to mid-tier Aussie gold miners
Six-month chart

Source: Bloomberg

Take Ramelius Resources (light orange line) and Aurelia Metals (dark orange line). Both are up about 20% on the Aussie dollar gold price.

Whereas Resolute Mining (blue line) and Westgate Resources (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 is exploring and confirming gold deposits. And Aurelia is pouring an ounce of gold for the bargain basement price of $738 per ounce.

Compare that to Resolute and Westgate, where one ounce of gold costs them $1,378 and $1,534 respectively.

Are you sensing a pattern here?

What the big gold miners and the mid-tier ones have in common is that cash costs count.

The cheaper a company can mine gold for, the more likely its share price will outperform the physical price of Aussie dollar gold.

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?

Well, maybe.

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
Six-month chart

Source: Bloomberg

Here, we have two companies that have underperformed when compared with the rising Aussie dollar gold price. And one company (grey line) that has significantly beaten the gold price rise.

How?

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 cheap, 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 then,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia