Behold the Titans of Gold

In a world enamored of fame and fortune, the stars among the miners of golden fortunes attract paparazzi-like attention with every earnings release.

Barrick Gold (NYSE: ABX  ) and Newmont Mining (NYSE: NEM  ) are the darlings of gold's red carpet. Although Barrick Gold's net earnings fell 28% and Newmont's take slid 48% over the prior-year period, there were moments of brilliance.

The world's largest producer, Barrick Gold, hogged the spotlight with 1.76 million ounces of production at a lean cost of $404 per ounce after by-product credits. Impressively, those costs would have come in $45 lower if oil and currency hedges had followed the script. And the company's copper production transformed an average spot price of $1.56 into a realized price of $2.93 through the fickle magic of hedges.

Barrick Gold says these costs indicate a "lower production and higher cost quarter," adding that we can expect production and costs to improve as the year rolls on, which supports guidance calling for 7.2 million to 7.6 million ounces of gold at costs of $360 to $380 per ounce for 2009. Since I consider another monster move from gold inevitable as the global financial crisis continues to weigh on a structurally impaired U.S. dollar, these forecasts translate into continuing operating margins that should delight investors.

In addition to the Hemlo mine acquired at fire-sale prices from debt-laden Teck Cominco (NYSE: TCK  ) , Barrick Gold is focused on the new Buzwagi mine in Tanzania. The first gold pour is expected soon, and Barrick Gold is looking for 200,000 ounces from the project in 2009.

Barrick Gold, to me, is like Keanu Reeves. I just don't see the talent, even though his staying power suggests that many others do. To Reeves' credit, though, he's never muddied a performance with insider selling, confusing hedge positions, nor environmental controversy.

The gold down under
I see Newmont Mining as more of a Tom Hanks type, whose talent has notably improved over time. Newmont Mining dazzled audiences by consolidating its ownership of the world-class Boddington mine in Australia. The $1 billion deal with former stakeholder AngloGold Ashanti (NYSE: AU  ) grants Newmont Mining full exposure to a project that will yield 1 million ounces of gold annually. Like Barrick Gold, Newmont Mining expects expanding margins to accompany the resulting boost in production. After starting up this summer, Boddington is expected to reach full capacity after 12 months.

Although Newmont Mining's average realized copper price of $1.69 per pound in the first quarter was short of Barrick Gold's $2.93, Newmont Mining's cost basis of just $0.89 overwhelmed Barrick Gold's $1.32. Fortuitous hedging is one way to produce margins, but I much prefer the old-fashioned method of achieving sustainable low-cost production.

Newmont Mining tops this Fool's list of gold stars, and it forecasts 5.2 million to 5.5 million ounces of production at a cost of $400 to $440 per ounce (corresponding to Barrick's estimated co-product cost of $450 to $475). Since I recently decided that Goldcorp (NYSE: GG  ) and Kinross Gold (NYSE: KGC  ) should graduate into the elite club of major producers, that top spot is not issued lightly.

Clearing the air
Last month, rumors swirled about a potential combination between Newmont Mining and Barrick Gold, reviving similar speculation that had circulated back in 2007. The rumor emerged after Newmont Mining CEO Richard O'Brien had alluded in an interview to potential synergies in places like Nevada where both companies operate, but O'Brien quickly clarified that no such discussions are in play.

I consider a broader combination extremely unlikely. Lacking the degree of organic growth potential of budding intermediate producers like Yamana Gold (NYSE: AUY  ) , major miners like Barrick Gold and Newmont Mining must turn to acquisitions of less-developed assets to maintain their reserve bases.

Parting thoughts
Fools will want to perk up their ears when these executives speak. Whatever one's views of the companies themselves, these guys know their gold market and understand as clearly as anyone out there what is driving this multiyear bull market for gold.

Barrick Gold CEO Aaron Regent raised a few eyebrows recently by suggesting a looming shortfall in the gold supply. Citing increasing lead times of seven to 10 years on mine development projects, Regent observed that the 100 million ounces that miners needed annually to maintain a balanced market was not being met.

With the most important contribution of all, consider this gem from O'Brien: "Since last fall we have seen a decoupling of the traditional relationship between a weaker U.S. dollar and stronger gold prices. [...] We do expect gold prices and the U.S. dollar to recouple in the near future [...]. As this occurs we expect inflation risks to return with U.S. dollar weakening and lifting of gold prices." With that spot-on forecast, I might just want O'Brien's autograph after all.

Further Foolishness:

Gold is a hot topic on the blogs at Motley Fool CAPS. Join the free service today and see just how many Fools are taking the long view on this precious metal's prospects. The "Gold" tag at CAPS lists 39 companies, and you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker sees a pot at the end of the rainbow for investors with exposure to gold. He can be found blogging actively and acting Foolishly in the CAPS community under the name TMFSinchiruna. He owns shares of Kinross Gold and Yamana Gold. The Motley Fool has a gilded disclosure policy.


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  • Report this Comment On May 02, 2009, at 11:13 AM, Alex1963 wrote:

    Chris

    As always great info on the commodities picture.

    Just one last request for a reply from you to a post I put on your "China Secretly Stockpiling Gold Since 2003!!

    I'm sure your busy but perhaps I offended in some way? I hope not. And I certainly hope it wasn't because what I wrote was unworthy of comment for some reason. It took me some time to put that together and I am trying to get more conversant on a subject you are adept in so your response would be appreciated.

    Thanks

    Alex

  • Report this Comment On May 02, 2009, at 11:51 AM, XMFSinchiruna wrote:

    Hi Alex, I'll be happy to reply over the weekend. Sorry for not responding sooner. :)

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