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With gold prices exhibiting persistent strength, and mining costs declining significantly from last year's oil-fueled spike, the time is ripe for miners to show off some of that golden profit potential I've touted for so long. For weary investors, however, the wait continues.
Kinross Gold (NYSE: KGC ) this week became the latest in a string of gold miners to report wholly unimpressive bottom-line results in the face of outstanding market conditions.
Despite a record operating margin of $481 for every gold equivalent ounce (GEO) sold, and a healthy 38% increase in production to 560,479 GEOs, Kinross yielded a disappointing net profit margin of just 3.2%. Adjusting for items like a $57.5 million foreign exchange loss, however, earnings increased 70% over last year to a more respectable $84.3 million. I would have preferred to highlight the company's many operational achievements and its bullish project pipeline, but instead that currency loss beckons.
Across the gold mining sector, a clear pattern emerged from second-quarter results: devaluation of the U.S. dollar relative to currencies of mining jurisdictions led to foreign exchange losses on future liabilities like mining taxes and reclamation expenses.
As I pointed out in the case of Yamana Gold (NYSE: AUY ) , there is an inescapable irony of investors fleeing dollar weakness through exposure to gold miners ... only to have earnings crushed by that same falling dollar. I hope gold investors can chuckle at the irony, because they saw plenty of it. Agnico Eagle Mines (NYSE: AEM ) took a $16.7 million hit, Yamana lost more than $60 million to these items, and Kinross rival Goldcorp (NYSE: GG ) recorded an astonishing $326 million currency-related charge.
Because my forecast for substantially higher gold prices is predicated on expectations for further devaluation of the greenback, these currency losses can not be brushed aside as one-time obstacles to profitability. The above miners remain more attractive to this Fool than hedged producers like Randgold Resources (Nasdaq: GOLD ) or Barrick Gold (NYSE: ABX ) , but this currency conundrum must be addressed.
Is the solution right under their noses?
If only gold miners had some kind of an asset at their disposal that could serve to counteract the impacts of dollar devaluation. Wait a second, how about gold?
What if miners held back a small portion of production, commensurate with the scale of dollar movements, as a physical reserve for those future liabilities? Could it be that simple? Write a comment and let fellow Fools know what you think about the idea.