Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market Election Year Cycles – What to Expect? - 4th Jun 20
Why Solar Stocks Are Rallying Against All Odds - 4th Jun 20
East Asia Will Be a Post-Pandemic Success - 4th Jun 20
Comparing Bitcoin to Other Market Sectors – Risk vs. Value - 4th Jun 20
Covid, Debt and Precious Metals - 3rd Jun 20
Gold-Silver Ratio And Correlation - 3rd Jun 20
The Corona Riots Begin, US Covid-19 Catastrophe Trend Analysis - 3rd Jun 20 -
Stock Market Short-term Top? - 3rd Jun 20
Deflation: Why the "Japanification" of the U.S. Looms Large - 3rd Jun 20
US Stock Market Sets Up Technical Patterns – Pay Attention - 3rd Jun 20
UK Corona Catastrophe Trend Analysis - 2nd Jun 20
US Real Estate Stats Show Big Wave Of Refinancing Is Coming - 2nd Jun 20
Let’s Make Sure This Crisis Doesn’t Go to Waste - 2nd Jun 20
Silver and Gold: Balancing More Than 100 Years Of Debt Abuse - 2nd Jun 20
The importance of effective website design in a business marketing strategy - 2nd Jun 20
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like TRADE.com are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Most Gold Miners are Sacrificing Profits for Growth

Commodities / Gold & Silver Stocks Nov 11, 2012 - 12:36 PM GMT

By: DailyWealth

Commodities

Best Financial Markets Analysis ArticleMatt Badiali writes: Hardcore gold and gold-stock investors are a unique breed.

They are not like "normal" investors. Most hardcore gold investors see gold (and often silver) as the only real form of money. They expect it to soar when the world falls apart. They fall in love with gold... more so than an investor likes his shares of Google or Microsoft. So when gold and gold stocks fail to live up to bullish expectations, the level of disappointment is very high.



I see gold as "real money" as well. I'm a proud gold owner. But my job is to help readers make money, not to get emotionally attached to any one investment.

That's why we need to understand why over the last decade... an investment in gold bullion performed 30% better than the largest gold miners in the industry. If you don't understand what I'm about to tell you, you could be making a huge mistake...

Historically, companies that mine and produce gold do well as the price of gold rises.

However, since 2002, the gold price has risen 446%, while the benchmark index of gold-mining stocks – the NYSE Arca Gold BUGS Index ("HUI") – is up just 344%. And gold bullion has outperformed mining companies by a ratio of 5-to-1 since January 2010.

According to Michael Kosowan, a former engineer with giant miner Placer Dome, the reason is simple... Most miners sacrificed profits for growth.

These companies had little competition for gold-investing dollars. Before 2005, the only way to invest in gold was to buy bullion or gold-mining stocks. And since investors rewarded companies that grew (by valuing businesses on the size of their reserves)...

Grow they did – poorly and with little discipline.

The companies' primary focus wasn't running profitable mines... but tapping as much of that investment capital as possible. Whether a mining project could ever turn a profit mattered less than simply jacking up reserve numbers. So the companies routinely overpaid for bad assets.

That devastated their shareholders' returns. Let me show you what that looked like with a well-known gold miner...

From 2005 to 2011, Agnico-Eagle added 8 million ounces of gold to its reserves – an impressive 80% surge from its 2005 reserve total of 10.4 million. It even grew production by 308%. That all looks great... especially when you factor in gold's run from $425 per ounce to more than $1,500 per ounce during that period.

That should be the ideal situation – growing gold production, while gold prices are soaring.

The following chart shows how well investing in growth worked out... It shows two key measures of Agnico-Eagle's business – profit margin and return on invested capital (ROIC).


While the profit per ounce looked great in 2006-2007, the more insidious number here is the ROIC. This simple measure shows us how much profit a company makes from the money it plows into the business. And as you can see, Agnico-Eagle's ROIC is in the single digits, hitting a low of 3% in 2011. That's terrible...

Gold prices were sailing higher... But Agnico's acquisitions were low-margin businesses – properties that cost a lot of money to mine.

About half of Agnico's reserve growth during the period came from its "flagship" acquisition, the Meadowbank mine. In 2007, Agnico-Eagle acquired Cumberland Resources, which owned Meadowbank, for C$710 million. It was touted as a low-cost gold producer in the Nunavut region in far northeastern Canada.

When Agnico evaluated Meadowbank for acquisition, the company projected mining costs at $224 an ounce, well below the average price of gold at the time – $604 an ounce. In fact, today, mining costs run around $1,040 per ounce.

Part of the problem is location. Transportation is a component of production costs... and transporting gold from remote Nunavut is wildly expensive. Another problem is that Agnico thought the mine would help propel its production to more than 1.3 million ounces per year by 2010... That didn't quite happen. The company produced 990,000 ounces last year... well short of its stated goal.

In the fourth quarter of 2011, the company wrote off $604 million on the project... 85% of its initial acquisition price four years earlier.

That's $604 million of shareholder money gone forever. And it shows. Over the last five years, gold has more than doubled in price. Agnico shares are barely up 10%. You would have increased your returns 10-fold by simply stashing Maple Leafs under your mattress.

I picked on Agnico-Eagle today... but it's not the only big miner involved in this scheme. Gold-producing companies spent the last 10 years acquiring and merging with each other, pursuing growth at all costs. And we now have a handful of big mining companies saddled with lots of uneconomic assets.

In my next essay, I'll show you the worst of the bunch... and what gold-stock investors must be on the lookout for.

Good investing,

Matt Badiali

This "growth over profits" mentality is a huge problem for gold-stock investors... And last month, Matt showed readers one way this scheme can steal the cash right out of your pocket. Learn why it's so important to do your homework on gold stocks here.

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2011 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules