The first half of 2013 has been a rough year for those investing in gold mining companies, echoing the trends of the gold market in general. Share prices were down around 50% year-to-date in mid-July. The decline has led to $21 billion in write downs on gold assets for many of the top gold mining companies. Barrick Gold Corp. (ABX), which is the planet’s largest producer of gold, took an $8.7 billion write down, and several other larger firms experienced similar trends.
However, in the past few weeks things seem to have stabilized. Perhaps investors who were going to jump ship already did when the price of gold began to drop earlier this year. Those who remained committed to gold mining companies as an investment now wonder whether higher prices are in store for the rest of the year. The recent gold price has provided some positive news, as gold has fought back over the $1,300 an ounce mark and stayed there. The $1,300 number is a good benchmark, but gold mining companies look at the $1,200 mark with fear. If gold hits $1,200 an ounce, roughly half of all global gold production becomes unprofitable.
However, there is another number that investors and gold mining companies need to consider: the “all-in” number. This number includes costs to develop a resource, sustaining production at a mine over several years, and other costs such as royalties, permits, and community expenses.
This all-in cost has increased significantly over the past 5 years, with an average growth of 17% each year. Within a decade, if this trend continues, the all-in cost will be $2,000 an ounce, well above the current price of gold (roughly $1,300).
The good news is that currently, the all-in cost is below $1,200 for most mining companies (and significantly lower for some), so the industry has time to recover and get to where it needs to be in the next 10 years. The all-in cost depends largely on the mining company itself. To put it simply, the company needs to have the management in place that knows how to get the gold out of the ground for less than they can sell it for.
So, if you are considering investing in the gold mining industry, do your homework. Find out the all-in costs of the companies you are looking at. The price of gold is a constant no matter which company you are considering, but the all-in cost is a variable; those with lower all-in costs will be more profitable. ITM Trading Store Gold Online Fast