Best of the Week
Most Popular
1.Scottish Independence YES Vote Panic - Scotland Committing Suicide and Terminating the UK? - Nadeem_Walayat
2.Independent Scotland Will Disintegrate as Unionist Regions Demand Referendum's to Rejoin UK - Nadeem_Walayat
3.Bank of England Panic! Scottish Independence Bank Run Already Underway! - Nadeem_Walayat
4.Gold and Silver Price Ready To Go BOOM - Austin_Galt
5.Gold and Silver Potential Price Meltdown Scenario - Rambus_Chartology
6.Scottish Independence UK Catastrophe - The Balkanisation of Britain - Video - Nadeem_Walayat
7.The Price Of Gold And The Art Of War Part I - Darryl_R_Schoon
8.Main Reason Why Scotland Will Vote NO to Independence, 70% Probability - Nadeem_Walayat
9.Heavy Gold and Silver Shorting is Bullish - Zeal_LLC
10.10 Year U.S. Treasury Short Best Place to be Remainder of 2014 - EconMatters
Last 5 days
Bitcoin Price Charts In-Depth Analysis - 19th Sept 14
Alibaba is Focused, Will Use Money in Emerging Areas - 19th Sept 14
Bird's Eye View of the Gold Stocks - 19th Sept 14
Scotland Independence Result NO Win 55% to Yes on 45% - 18th Sept 14
Silver Price: A Collapse and a Rally - 18th Sept 14
Here's Why Trendlines are Your New Trading Best Friend - 18th Sept 14
Silver Buyers Keep Stacking And Demand Higher Despite Falling Prices - 18th Sept 14
The "Hidden" Billions in the Alibaba IPO - 18th Sept 14
Russian Union Of Engineers Accuses Ukraine Airforce In MH17 Crash - 18th Sept 14
Monetary Policy Weighs on Gold and Silver - 18th Sept 14
Global Currencies Analysis...The World According to Chartology - 18th Sept 14
Gold Price Hammered by Strong U.S. Dollar - 18th Sept 14
Is Citigroup the Dumbest Bank Ever? - 18th Sept 14
Scotland Must Vote Yes! For All Of Us - 18th Sept 14
Scottish Independence Referendum Result NO 55%, YES 45% - Vote Forecast - 18th Sept 14
A Public Bank Option for and Independent Scotland - 17th Sept 14
The Charade of Independence for Scotland and UKIP - 17th Sept 14
Gold Report - U.S. National Debt Surges $1 Trillion In Just 12 Months - 17th Sept 14
How to Find Trading Opportunities in ANY Market Using Fibonacci Analysis - 17th Sept 14
Why Money Is Worse Than Debt - 17th Sept 14
Can Gold Price Finally Recover? - 17th Sept 14
Scotland Independence - Europe Holds Its Breath - 17th Sept 14
The Energy Prices at Risk with Scottish Independence - 17th Sept 14
Scottish Independence SNP Lies on NHS, Economy, Debt, Oil and Currency - 17th Sept 14
The Truth Behind the Dangerous "Helicopter Money" Delusion - 16th Sept 14
Central Bank Balance Bullying: Investor Implications - 16th Sept 14
U.S. Dollar and Gold Elliott Wave Projection - 16th Sept 14
The Origins and Implications of the Scottish Referendum - 16th Sept 14
The Collapse Of U.S. Silver Stocks As Public Debt Skyrockets - 16th Sept 14
Emerging Markets Are Set Up for a Crisis, What’s on Your Radar Screen? - 16th Sept 14
Scottish Independence Bank Run Already Underway - Video - 16th Sept 14
The Emergence of the US Petro-Dollar - 16th Sept 14
Economic GDP Drives Stock Prices Inestment Myth - 16th Sept 14
Don't Miss This Gold Buying Opportunity - 16th Sept 14
Why ECB QE Is Bearish For Gold Prices - 15th Sept 14
Property Rights and Property Taxes—and Countries That Don’t Have Them - 15th Sept 14
Junior Miners Breaking Out Higher Forecasting Gold and Silver Price Bottom? - 15th Sept 14
Stock Market Patiently Waiting for Mean Reversion - 15th Sept 14
A Closer Look at the US Dollar - 15th Sept 14
The Silver Price Sentiment Cycle - 15th Sept 14
Stock Market Correction Underway - 15th Sept 14
Marc Faber - “I Want To Be Diversified, I Want To Own Some Gold” - 15th Sept 14
The Myth of Nuclear Weapons - 15th Sept 14
US Dollar Forecast to Go Much Higher - 15th Sept 14
Analysis And Price Projection Of The Uranium Market - 15th Sept 14
Bank of England Panic! Scottish Independence Bank Run Already Underway! - 15th Sept 14
The Ethics of Entrepreneurship and Profit - 14th Sept 14
The Big Investor Opportunity in the Orbital Space Junkyard - 14th Sept 14
Kohl's and The Rest of The Retailers are in Deep Doo Doo - 14th Sept 14
Independent Scotland Will Disintegrate as Unionist Regions Demand Referendum's to Rejoin UK - 14th Sept 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Huge Stocks Bear Market

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

© 2005-2014 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

Free Report - Financial Markets 2014