Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Identifying Bright Spots in the Choppy Gold Market

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

The record plunge in gold prices in 2013 hurt more than just gold miners' margins. Amid efforts to safeguard dwindling profits, it became apparent that most gold companies had been mismanaged prior to the unprecedented price drop. Not only did gold miners add high levels of debt in the years leading to the price decline, but no decisive measures were put in place to arrest soaring costs.

Even as gold companies struggle to turn ship, the outlook remains largely bearish. Needless to say, there are a few shimmers of hope. For instance, India is reportedly planning an imminent review of its current strict gold import laws. Similarly, continued devaluation in emerging market currencies is rekindling interest in gold as a safety net.

Still, however, this is not enough. The reality is that mining is a long-term business, sometimes having 30-year horizons. Before this current bearish cycle plays out to completion, prices will oscillate repeatedly but the key sticking points (e.g. debt, costs, unfavorable economic policy) will remain. Investors need to pick gold stocks that will not only weather the storm, but that can also emerge ahead of the competition when the bearishness clears.

Goldcorp better positioned to restructure
For most of 2013, gold miners were plagued with asset charges. Barrick Gold (NYSE: ABX  ) , for instance, took a $5.5 billion writedown in its Pascua Lama project in the Andes in mid-2013. Worse still, it recently warned that the project will take additional writedowns in the fourth quarter. In addition, Barrick Gold's CEO Jamie Sokalsky says that the company will recalculate its reserves at a gold price of $1,100 an ounce. This is the same company that had to raise $3 billion in equity in November 2013 in order to stay afloat.

Goldcorp  (NYSE: GG  ) similarly suffered impairment charges in 2013, but not as great as its peers. It was not only able to avoid most of the woes in the industry, but as at the end of 2012, its gold reserves were valued at $1,350, this was marginally higher than all of its peers (gold reserves are appraised annually and values released along with full year results). In consideration of the fact that Goldcorp was able to avoid most of the industry pitfalls in 2013, it is likely to maintain its edge relative to its competitors going forward. This couldn't come at a better time.

Gold miners need a new approach to Africa, and they need it fast. Labor costs in the continent, which has close to 40% of the global gold reserves, are rising disproportionately. There are many contributing factors including a bulging middle class with an insatiable demand for the good life and new government policies, just to name a few. In South Africa, for instance, unions such as the Association of Mineworkers and Construction Union (AMCU), representing 17% of mineworkers, have previously demanded minimum entry level wage of $1,250 per month for underground miners -- this is well over 50% of what entry level South African underground miners currently earn.

Similarly, the issue of 'resource nationalism' is sweeping through Africa. In South Africa, come 2015, holders of mineral licenses in the country are expected to use local suppliers to procure 40% of their capital goods, 30% of their services, and a full 50% of their consumables.

It is not helping that Africa's landscape is changing against the backdrop of major economic policy changes in the U.S. The Fed's decision to scale back on the bond buying program has translated into higher interest rates, further limiting demand for gold and dashing hopes for gold price appreciation.

Goldcorp, however, because of its better relative position, will be able to handle these challenges more effectively. It can leverage its stronger financial base to reorganize its value chain in Africa and include locals as required by certain laws in its areas of operation. Similarly, it is in a position to bargain better pay for petulant mine workers.

Goldcorp's recent aggressive, though unsuccessful, $2.6 billion bid to acquire Montreal-based Osisko Mining Corp shows that it not only has the financial muscle to turn ship, but it is willing to try new things.

Goldcorp's ability to make acquisitions during these lean times presents an opportunity to selectively acquire gold refiners in the future to pad its earnings. Gold refiners (jewelry makers etc) are currently enjoying huge margins in light of low gold prices and high demand in Asia. Although this is a long shot, the point remains that Goldcorp has more options at a time when most of its peers have very few. Goldcorp could be the best way to play gold's bearish stretch.

As every savvy investor knows...
Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2817478, ~/Articles/ArticleHandler.aspx, 8/28/2015 1:35:48 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Lennox Yieke

Lennox Yieke is a business writer who has a knack for not only seeing first what others see eventually, but telling the story from an entirely fresh, interesting, informed and ‘Foolish’ perspective. Join him as he covers energy, materials and utility stocks, breaking down mind-boggling numbers and loads of jargon into tidbits of understandable, valuable investing guidance. Always feel free to engage with him and share your latest ideas on Twitter @lyieke

Today's Market

updated 4 hours ago Sponsored by:
DOW 16,654.77 369.26 2.27%
S&P 500 1,987.66 47.15 2.43%
NASD 4,812.71 115.17 2.45%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/27/2015 4:08 PM
ABX $6.84 Up +0.31 +4.67%
Barrick Gold Corp. CAPS Rating: ***
GG $13.68 Up +0.57 +4.35%
Goldcorp, Inc. (US… CAPS Rating: ***