Best of the Week
Most Popular
1. Crude Oil and Water: How Climate Change is Threatening our Two Most Precious Commodities - Richard_Mills
2.The Potential $54 Trillion Cost Of The Fed's Planned Interest Rate Increases - Dan_Amerman
3.Best Cash ISA Savings for Rising UK Interest Rates and High Inflation - March 2018 - Nadeem_Walayat
4.Fed Interest Hikes, US Dollar, and Gold - Zeal_LLC
5.What Happens Next after February’s Stock Market Selloff - Troy_Bombardia
6.The 'Beast from the East' UK Extreme Snow Weather - Sheffield Day 2 - N_Walayat
7.Currencies Will Be ‘Flushed Down the Toilet’ Triggering a ‘Mad Rush into Gold’ - MoneyMetals
8.Significant Decline In Stocks On The Cards! -Enda_Glynn
9.Land Rover Discovery Sport Extreme Driving "Beast from the East" Snow Weather Test - N_Walayat
10.SILVER Large Specualtors Net Short Position 15 Year Anniversary - Clive_Maund
Last 7 days
Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - 19th Mar 18
2018 Reversal Dates for Gold, Silver and Gold Stocks - 19th Mar 18
This Tech Breakthrough Could Save The Electric Car Market - 19th Mar 18
Stocks Set to Open Lower, Should You Buy? - 19th Mar 18
The Wealth Machine That Rising Interest Rates Create Conflict With The National Debt - 19th Mar 18
Affiliate Marketing Tips and Network Recommendations - 19th Mar 18
Do Stocks Bull Market Tops Need Breadth Divergences? - 19th Mar 18
Doritos Instant £500 Win! Why Super Market Shelves are Empty - 19th Mar 18
Bonds, Inflation & the Market Amigos - 19th Mar 18
US Housing Real Estate Market and Banking Pressures Are Building - 19th Mar 18
Stock Market Bulls Last Stand? - 18th Mar 18
Putin Flip-Flops Like A Drunken Whore On Bitcoin Cryptocurrency Legalization - 18th Mar 18
How to Legally Manipulate Interest Rates - 18th Mar 18
Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - 18th Mar 18
Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - 17th Mar 18
Strong Earnings Growth is Bullish for Stocks - 17th Mar 18
The War on the Post Office - 17th Mar 18
GDX Gold Mining Stocks Fundamentals - 16th Mar 18
Nationalism, Not the Russians, got Trump Elected - 16th Mar 18
Has Bitcoin Bought It? - 16th Mar 18
Crude Oil Price – Who Wants the Triangle? - 16th Mar 18
PayPal Cease Trading Crypto Currency Bitcoin Warning Email Sophisticated Fake Scam? - 16th Mar 18
EUR/USD – Something Old, Something New and… Something Blue - 16th Mar 18
DasCoin: A 5-Minute Guide to How It Works - 15th Mar 18
Stock Market Downward Pressure Mounting - 15th Mar 18
The Stock Market Trend is Your Friend ’til the Very End - 15th Mar 18
6 Easy Ways to Get What Women Want, for Less! - 15th Mar 18
This Isn’t Your Grandfather’s (1960s) Inflation Scare - 15th Mar 18
Eye Opening Stock Market Index, Volatility, Charts and Predictions - 15th Mar 18
Gold Cup At Cheltenham – Gold Is For Winners, Not For Gamblers - 15th Mar 18
Upcoming Turnaround in Gold - 14th Mar 18
Will the Stock Market Make Another Correction this Year? - 14th Mar 18
4 Ways To Writing An Interesting Education Research Paper - 14th Mar 18
China Toward Sustainable Economic Growth - 14th Mar 18
Stock Market Direction Is No Longer Important - 14th Mar 18
Trade Tariffs Defeat Globalists and Return Prosperity - 14th Mar 18
Stock Market Crash is Underway and Cannot be Stopped! - 14th Mar 18
Are Energy Sector Stocks Bottoming? - 14th Mar 18
Nasdaq Stocks Soars to New Record High After Strong Job Reports - 14th Mar 18
Bitcoin BTCUSD Elliott Wave View Calling for Rally toward $15,000 - 13th Mar 18
Hungary’s Gold Repatriation Adds To Growing Protest Against US Dollar Hegemony - 13th Mar 18
Record Low Volatility in Precious Metals and What it Means - 13th Mar 18
Tips for Writing and Assembling the Classification Essay - 13th Mar 18
Gerald Celente "If Rates go up too High, the Economy goes Down, End of Story" - 13th Mar 18
Stock Market Selloff Showed Gold Can Reduce Portfolio Risk  - 13th Mar 18
Silver Does it Again! Severe Consequences - 12th Mar 18
Has the Stock Market Rally Run Out of Steam? - 12th Mar 18
S&P 500 at 2,800 Again, Stock Market Breakout or Fakeout? - 12th Mar 18
The No.1 Energy Stock To Buy Right Now - 12th Mar 18
What Happens Next When Stock Market Investor Sentiment is Neutral - 12th Mar 18
Economic Pressures To Driving Gold and Silver Prices Higher Long-Term - 12th Mar 18
Labour Sheffield City Councils Secret Plan to Fell 50% of Street Trees Exposed! - 12th Mar 18

Market Oracle FREE Newsletter

Urgent Stock Market Message

Most Gold Miners are Sacrificing Profits for Growth

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

By: DailyWealth


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.

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

© 2005-2018 - 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