OK, pretty simple thesis here. When things in the markets change, it behooves us as investors to examine certain companies and how the market will affect them.
Case in point: One of the cheapest set of companies in the world, right now, are the gold miners. Specifically, South African gold miners.
See, gold miners are completely sensitive to the costs they pay to mine the gold, relative to the price at which that gold ultimately sells. There's no such thing as a Yamana Gold (NYSE: AUY ) premium product, for example. (OK, I know, Yamana's Canadian.)
Since August, the South African rand has dropped from about 7.25 per dollar to 10. At the same time, gold prices have fallen from $1,000 per ounce to about $740, which I believe makes people wary of gold mining firms.
Now, as AngloGold Ashanti (NYSE: AU ) CFO Srinavasan Venkatakrishnan noted during the company's recent quarterly conference call, AngloGold's cash cost for gold production over the last quarter was $486 per ounce, and the company expected its costs to be around $460 an ounce this quarter. But -- and this is important -- if the South African Rand stays at 10 to the dollar, the company's cost of production would fall to between $430 and $440 per ounce.
The great currency/commodity mash up
Sell in dollars, pay in depreciated rand. But there's more. One of the biggest elements of the company's increased cost structure last quarter came from increases on fuel prices -- also paid in dollars. Brent Crude prices have dropped from about $140 per ounce of gold to a little more than $60. The company estimates that each $10 drop in oil prices reduces its cost by $6 per ounce.
These are good economic trends, even if the price of gold has dropped. Gold companies can make a ton of money under these circumstances. Besides, unlike other commodities, such as copper or nickel, gold production hasn't attracted massive levels of new capital investment: Total production has declined over the past six years, and may continue to decline for the next five, according to AngloGold.
So the selling pressure on the gold miners seems way overdone. In the last year, Harmony Gold (NYSE: HMY ) has shed 38% of its value; DRDGold (Nasdaq: DROOY ) 60%, AngloGold Ashanti 62%, Goldfields (NYSE: GFI ) 65%, Anooraq Resources (AMEX: ANO ) have lost more than 90%. With the exception of Anooraq, which has been a serial capital destroyer, all are attractively priced.
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Bill Mann is the advisor for the Fool's Global Gains international investing service. He's relatively sure that he has a stress fracture on his earlobe, but we're not quite sure what that's about. Bill owns none of the companies mentioned in this article, but he owns kind of a frightening amount of their products. The Fool is investors writing for investors.