Let the Golden Bonanza Begin

You don't know how lucky you are. A recent pullback in gold prices has dragged shares of gold miners through the mud, even as earnings results confirm just how profitable these companies will be once this multiyear secular bull market for gold resumes course.

Before earnings season, I pointed to second-quarter strength in gold prices, and range-bound energy costs, as principal reasons to expect rapid margin expansion and inspiring profitability from the world's producers of gold. Even with the handful of hiccups and challenges that always characterize this industry, thus far the miners have delivered the golden goods.

Newmont Mining (NYSE: NEM  ) enjoyed a cash operating margin of 59% -- or $708 for every ounce mined in the second quarter -- despite the formidable challenges encountered at Boddington. Leading producer Barrick Gold (NYSE: ABX  ) noted that its margin of $748 per ounce of gold marked an eye-opening 56% increase over the year-ago result. Smaller operators Agnico-Eagle Mines (NYSE: AEM  ) and Eldorado Gold (NYSE: EGO  ) kicked in comparable margins of $735 and $785 per ounce, respectively.

Goldcorp (NYSE: GG  ) , by far my top pick among the major miners, came to the plate with an incredible margin of $845 per ounce for each of the 598,000 ounces sold in the second quarter. Goldcorp's byproduct cost of $363 per ounce remains near the best mark of the pack. But just as Newmont surpassed Goldcorp momentarily in the first quarter, Barrick Gold actually took the low-cost prize by a nose, with a comparable cost of $358 per ounce.

Goldcorp posted record operating cash flow of $382.6 million for the period, and continues to report excellent progress on development projects that are key to the company's aggressive production growth strategy (targeting 3.8 million ounces annually by 2014).

Remember, not so long ago, gold prices themselves hovered below the range of these margins being reported now. The industry has come a very long way in terms of profitability since that infamous gold correction gave investors a serious gut check.

If you agree with this bullish Fool that gold prices are headed substantially higher as major currency woes persist, then you will no doubt appreciate the leverage that these expanding margins will provide. Goldcorp President and CEO Chuck Jeannes said it best: "Our strong financial results in the second quarter demonstrate Goldcorp's continued progression toward a period of sustained cash flow expansion."

This Fool will continue to track the appropriate profitability metrics carefully, while keeping a vigilant eye on the fundamental economic landscape as it pertains to the gold price outlook. In the meantime, curious investors may wish to take a look at compelling value play Yamana Gold's (NYSE: AUY  ) track record for low mining costs to envision the kind of profitability that this lagging miner is ultimately likely to deliver.

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 when it comes to investing in gold. The "Gold" tag at CAPS lists 55 potential investments, and you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly in the CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of Agnico-Eagle Mines, Eldorado Gold, and Yamana Gold. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 30, 2010, at 3:04 PM, outoffocus wrote:

    Chris,

    Do you think CDE will turn a profit this quarter?

  • Report this Comment On July 30, 2010, at 3:38 PM, silverminer wrote:

    wouldn't that be something? :0

    I do think people will be pleasantly surprised by CDE, both in Q2 and hereafter ... silver margins have grown even fatter.

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