Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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

© 2005-2022 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