| COMMODITIES CORNER Has gold bottomed out or it it in a rally? If not, when will it rally? Regardless of how the precious metal performs, gold analyst Mat Badiali, explains that you need a safeguard and profitable position that can weather the storm. |
By Matt Badiali
As I expected would happen in late June, gold stocks have put in a bottom and staged a huge rally. The benchmark gold index is up 36% off its lows. I expect gold stocks will work higher over the longer-term. Of course, there will be corrections along the way, which is why you should stick to some of the world's safest gold stocks.
The key to safety is to focus on "all-in" costs. This is the total cost of an ounce of gold production. It includes the cost of mining at each mine the company owns, plus the costs of running the company. It is a way to look at gold-mining companies as businesses, instead of simply a way to play rising gold prices. It's a critical idea for making money in the gold-stock sector.
In my most recent issue of the S&A Resource Report, I presented a proprietary, in-depth analysis of the gold sector. I showed readers a selection of the best companies from the gold sector with our estimated "all-in" costs. It's important to understand that we did not try to figure out the industry's "all-in sustaining cost" that we see companies reporting today. We used some assumptions that the industry wouldn’t want.
For example, I assumed unprofitable mines were closed.
In the table below, I compared the all-in cost and the price of gold at the top of the column. If the costs are higher than the gold price, the company will lose money. We sorted the list by operating costs with gold at $1,200 an ounce, the recent low.
As I expected would happen in late June, gold stocks have put in a bottom and staged a huge rally. The benchmark gold index is up 36% off its lows. I expect gold stocks will work higher over the longer-term. Of course, there will be corrections along the way, which is why you should stick to some of the world's safest gold stocks.
The key to safety is to focus on "all-in" costs. This is the total cost of an ounce of gold production. It includes the cost of mining at each mine the company owns, plus the costs of running the company. It is a way to look at gold-mining companies as businesses, instead of simply a way to play rising gold prices. It's a critical idea for making money in the gold-stock sector.
In my most recent issue of the S&A Resource Report, I presented a proprietary, in-depth analysis of the gold sector. I showed readers a selection of the best companies from the gold sector with our estimated "all-in" costs. It's important to understand that we did not try to figure out the industry's "all-in sustaining cost" that we see companies reporting today. We used some assumptions that the industry wouldn’t want.
For example, I assumed unprofitable mines were closed.
In the table below, I compared the all-in cost and the price of gold at the top of the column. If the costs are higher than the gold price, the company will lose money. We sorted the list by operating costs with gold at $1,200 an ounce, the recent low.
All but Agnico Eagle are profitable with gold at $1,200 per ounce. If gold suffers another big move down, however, a lot of these businesses will struggle. You can see what I mean in the table below. It shows how much money each company will earn at a given gold price.
These numbers are the profit per ounce multiplied by the volume of gold produced per year. We sorted the table by earnings at $1,200 an ounce.
These numbers are the profit per ounce multiplied by the volume of gold produced per year. We sorted the table by earnings at $1,200 an ounce.
At $800 per ounce of gold, our model estimates that nine companies will not be profitable. On the other hand, we see companies like Barrick, Iamgold, Randgold, and New Gold should be profitable. Now, I'm not saying gold will go down to $800 an ounce or even $1,200 an ounce.
But if you're interested in gold companies that will stay profitable if gold doesn't soar from its current levels, consider owning the companies with the low "all-in" costs. These are the safest gold companies on the market. And they're the ones I'm encouraging my readers to own.
But if you're interested in gold companies that will stay profitable if gold doesn't soar from its current levels, consider owning the companies with the low "all-in" costs. These are the safest gold companies on the market. And they're the ones I'm encouraging my readers to own.
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