Is the Tide Finally Turning for Gold Miners?

Gold supply could be running short, and Barrick Gold (NYSE: ABX  ) , Newmont Mining (NYSE: NEM  ) , and Goldcorp (NYSE: GG  ) might be about to see a surge in profitability as a result. 

Vanishing gold
As part of its job, COMEX, one of the main exchanges for gold trading, keeps tabs on how much gold is available in its vaults for delivery to customers at any one point. However, COMEX currently has a problem, according to their most recent release: There are 65 claims, or owners, for every ounce of gold held in the exchange's vaults. In effect, this means that every ounce of gold you buy, you're going to have to fight 65 other people to get hold of it if you want physical delivery. This is a record for the past decade.

As any business student will tell you, when demand is greater than supply, prices will rise, and this is exactly what could happen to gold during the next year or so. Now, I'm not saying that it will happen, but with 65 claims per gold ounce available, prices could move higher very quickly.

So is it time to start buying gold miners?

Where are the best deals?
Many investors have rightfully been scared away from gold miners during the past year as profits have been falling and costs rising. However, I believe that the sector now looks attractive after recent declines. Actually, proactive managements focused on slashing costs and cutting capital spending have now maneuvered miners into positions where they look well placed to ride out the current gold price weakness.

For example, Barrick, the world's largest gold producer by output, announced that it had managed to push down its all-in sustaining cash cost of production, or AISC, by 10% year on year at the end of the fiscal third quarter, to $916 per ounce. The company is also slashing jobs and removing what it calls 'management layers' to improve the company's structure.

Newmont also cut its AISC by 16% year on year to the end of the fiscal third quarter. What's more, the company is now focusing on quality over quantity, selling off non-core assets such as its Canadian oil sands venture. These measures helped Newmont become free-cash-flow positive for the first time in two years during the third quarter.

Meanwhile, Goldcorp's, AISC dropped to $992 per ounce in the third quarter, down from $1,279 in the second quarter as the company slashed capital spending and ramped up mine production.

These cost-cutting measures, along with more efficient business operations should prime these companies for future growth. The measures are also eliminating the excesses of the gold industry during the past few years, where mines have been spending excessively, using the high gold price as a distraction.

In addition, with lower costs and a better business structure, these miners are primed to generate stronger profits when the price of gold starts to rise again.

Foolish summary
So overall, with a record 65 claims per ounce of gold available in COMEX's vaults, gold is in short supply. This could only mean one thing: Sooner or later, people will try to withdraw gold that's not there, resulting in a large upward correction.

However, until this happens the direction of the price of gold is uncertain. Still, the best way to wait for the correction is to place your bets on the miners with the lowest cost of production as they are likely to remain profitable until the market turns around. All in all, then Barrick, Newmont, and Goldcorp could be great long-term plays on the metal, primed for a return to profit.


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  • Report this Comment On December 08, 2013, at 2:06 PM, WCoastGuynCA wrote:

    China continues to accumulate tremendous quantities of gold with their eventual plan of having a "gold backed" Yuan replace the dollar as the world standard currency.

    The Yuan recently moved ahead of the Euro and into second place as the currency most used in global trade transactions.

    The bottom in the price of gold is at hand and the Chinese are welcoming the current low price to continue to add to their reserves.

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