The Gold Rebound Is Coming

As the gold bloodbath settles down, it's time to take a good look at conservative miners like Yamana.

Feb 3, 2014 at 8:54AM

There is hope for the gold mining industry. Falling gold prices appear to have stabilized at around $1,250 per ounce. Analysts are hopeful that falling mine production in 2014 will help to bring supply closer to demand. All of the capital expenditures projects cancelled or deferred in 2013 will only create supply constraints further down the road, pointing to a stronger turnaround in the years to come.

The bad news
The price of gold is hovering very close to the estimated average cost of production including sustaining capital costs at or above $1,100 per ounce. This has left many miners with significantly reduced earnings. Yamana Gold's (NYSE:AUY) third-quarter 2013 earnings before interest, taxes, depreciation, and amortization of $206 million is a big drop from the $368 million it brought in for Q4 2012. Goldcorp (NYSE:GG) is in a similar situation, with its EBITDA having fallen from $807 million to $327 million in the same time period.

Many companies have been forced to cut back and sell off assets. After selling three high-cost Australian mines in 2013, Barrick Gold (NYSE:ABX) just decided to sell its Kanowna mine for $66 million. To help reduce capex, its expensive Pascua-Lama project was recently suspended as well.

The good news
In 2013 gold mine production actually rose an estimated 4.1% from 2012. Now the industry is shrinking production growth through reduced capex and a more selective investment process. These and future supply restrictions should help create a more balanced supply and demand situation, eventually boosting prices.

Goldcorp is a great example of industry trends. Thanks to projects like Pueblo Viejo ramping up to full production, the company expects that its annual gold production will increase to a range of 3.7 million to 4 million ounces in 2016 before settling down to between 3.5 million and 3.8 million ounces in the following years. While the supply of gold doesn't instantly respond to price changes, eventually it will. 

Kinross Gold (NYSE:KGC) is another miner slowly rationalizing its production. It cancelled its Fruta del Notre project in Ecuador after issues with the government.

Another great piece of news for the industry is that hot-money outflows have been partially counteracted by strong jewelry imports in China and India. It is estimated that between September 2012 and September 2013 China's consumption of jewelry, bars, and coins grew 30% and India's grew 24%. As the gold price stabilizes close to the cost of production, investors should slowly start to come back into the market, creating the next boom cycle.

Start searching for investments
The 2013 bloodbath has forced miners to bring their costs down, and many have little room left. The industry average cost of production including sustaining capital costs is estimated to be around $1,100 per ounce or more. The upside is that since the easy cost reductions have already been found, the price of gold doesn't have much more room to fall before many miners start to consider temporary shutdowns of their facilities.

In the first three quarters of 2013, Goldcorp produced 1.9 million ounces of gold with an all-in sustaining cost of $1,136 per ounce. Newmont Mining is another low-margin player, with gold production of 3.6 million ounces in the first three quarters of 2013 and an all-in sustaining cost of $1,137 per ounce. Kinross is not the highest-cost producer, but with all-in sustaining costs at $1,045 per ounce in the same time period, it doesn't have much wiggle room.

Low-cost miners
Not all miners are running expensive operations. In the first three quarters of 2013 Barrick Gold's all-in sustaining cash costs were just $919, and Yamana's were even lower at $834. The big difference between Barrick and Yamana is that Yamana only produced 0.8 million ounces of gold while Barrick produced 5.5 million ounces.

Look for growth
While Yamana and Barrick both run low-cost operations, Yamana is in a better position to grow. Its smaller production base means that producing an extra 0.25 million ounces of gold per year would provide a significant boost to its bottom line, while Barrick would need approximately seven mines of this size to provide a similar production boost. 

Yamana's conservative financials give it another advantage. Its 2012 gold reserves of 17.7 million ounces look tiny compared to Barrick's 2012 gold reserves of 140 million ounces, but Barrick assumed a gold price of $1,500 per ounce while Yamana used a far more reasonable price of $950 per ounce. Seeing as the price of gold is around $1,250 per ounce, Barrick's 2013 reserves should see a significant drop.

Bottom line
The price of gold is stabilizing, and the winners and losers are clear. Higher-cost producers like Kinross and Goldcorp face a number of challenges, while Yamana's low cost of production and small production base will help it focus on developing choice assets. The market is starting to calm down, and now is a great time to start shopping around.

The Motley Fool's Top Stock for 2014
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Joshua Bondy has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers