The past week has been a surprisingly turbulent time to be a precious-metals investor. It looked as if uncertainty would reign once Donald Trump had secured victory as America's president-elect. However, physical gold and silver have been pummeled in the days that followed. After hitting an intraday high of $1,340 per an ounce on Wednesday, Nov. 9, gold dipped as low as $1,211 per ounce on Monday, Nov. 14. That's a massive swing, and it's crushed both physical gold and gold-mining investors.
Why has the uncertainty surrounding Trump's presidency suddenly led to a rapid devaluation in physical gold? For starters, Trump's economic policies are designed to promote economic growth, and they take America down a dramatically different path from what we're on now.
Trump's plan calls for substantially lower individual and corporate income taxes, energy independence for America, and up to $1 trillion in infrastructure spending over the next decade. If enacted, it's possible this plan could lead to inflation and higher GDP growth. Just the potential for higher GDP growth has some investors swapping out bonds for stocks. Since bond prices and bond yields have an inverse relationship, selling bonds means rising yields, and thus a higher opportunity cost of owning gold, which has no yield, over an interest-bearing asset such as a bond.
Additionally, Trump has favored a higher-interest-rate environment. During his campaign, Trump was highly critical of the Federal Reserve and its historically low federal funds target. Though Trump can't alter the course of monetary policy, his mere suggestion that rates should be higher could be influencing the bond market and increasing the opportunity cost of owning gold.
15 reasons not to worry about falling gold prices
Despite this weakness, there are still plenty of reasons gold could actually outperform under Trump. For instance, the uncertainty of having a career businessman with no formal political or military experience running the country could send investors back to gold. Running a country and running a business are two very different animals. Supply and demand has also favored gold. In numerous quarters recently we've witnessed demand outpacing supply, which is often a recipe for higher prices.
But there are 15 other reasons this drop in gold prices shouldn't worry investors of gold miners. Despite physical gold prices that dipped to $1,221 per ounce as of Monday's New York close, these 15 gold miners all have a healthy buffer between the current spot price of gold and their projected all-in sustaining costs (AISC) for the current fiscal year. Here's a look at the magnitude of this per-ounce buffer, using the midpoint of the AISC guidance offered by each gold miner:
- Barrick Gold (NYSE:GOLD): $463.50 margin based on $757.50 AISC.
- New Gold: $451 margin based on $770 AISC.
- McEwen Mining: $441 margin based on $780 AISC.
- Goldcorp (NYSE:GG): $333.50 margin based on $887.50 AISC.
- Newmont Mining: $321 margin based on $900 AISC.
- Yamana Gold: $321 margin based on $900 AISC for gold production.
- Eldorado Gold: $306 margin based on $915 AISC.
- Kinross Gold: $281 margin based on $940 AISC.
- AngloGold Ashanti: $226 margin based on $995 AISC.
- Gold Fields: $216 margin based on $1,005 AISC.
- IAMGOLD: $146 margin based on $1,075 AISC.
Further, these mining companies didn't offer specific full-year guidance but have been delivering solid results:
- Royal Gold (NASDAQ:RGLD): $869 margin based on $352 AISC for gold stream in Q1 2017.
- Agnico-Eagle Mines: $400 margin based on $821 AISC through Q3 2016.
- Sibanye Gold: approximately $216 margin based on AISC guidance of 20% below $1,255 per ounce.
- Randgold Resources: Total cash costs (not to be confused with AISC) of $679 per ounce through Q3 2016.
With the exception of the African miners, which have historically struggled with higher labor costs and a greater propensity for political instability and labor-based disruption, the margin between the current spot price of gold and these AISC forecasts is huge. While AISC isn't a perfect measure of total costs -- it doesn't factor in the discretionary nature of capital expenditures or help investors understand the difference between sustaining and non-sustaining capital expenditures -- it's one of the best gauges of profitability for mining stocks. Based on these triple-digit AISCs, gold miners are going to remain healthfully profitable, even if gold were to fall another $100 per ounce, or more.
A testament to cost-cutting
What we're really seeing with the aforementioned AISC figures is prudent cost management by most gold-mining companies. While all have done a good job of lowering their costs, there are obviously a few standouts that investors may want to take note of.
Naturally, Royal Gold probably stands out with its $869 gross margin over the current spot price. Remember, though, Royal Gold isn't a traditional mining company, so its sustaining costs are much lower. Royal Gold is a streaming company that supplies upfront capital to mining companies in exchange for a percentage of the gold, silver, or other byproducts they produce. Its contracts are often for the life-of-mine, or an extended period of time. As long as its many contracted partners continue to produce, Royal Gold should be able to withstand a large drop in gold prices with relative ease.
Barrick Gold has also done an exceptional job of reducing its expenses. After repaying around $3.1 billion in debt during 2015, Barrick Gold has repaid $1.4 billion more through Q3 2016, and it remains on track to reduce its debt by $2 billion in 2016. The company's intermediate goal is to reduce its debt to $5 billion from the $13 billion it entered 2015 with on its balance sheet. It's also on track to spend $1.2 billion to $1.3 billion in capital expenditures in 2016, down from its original guidance of $1.35 billion to $1.65 billion, and less than half of what it was spending on capex back in 2012. As icing on the cake, Barrick Gold has also jettisoned non-core assets to help in repaying debt.
Goldcorp has been looking internally for cost-savings in an effort to save $250 million annually. A recent analysis at Porcupine is expected to yield $35 million in annual cost savings, which supplements the $65 million in savings identified at Cerro Negro, and $55 million at the company's headquarters. When added to Goldcorp's metal byproduct credits, its AISC could remain well below spot gold.
Though falling gold prices aren't optimal for gold miners, there's nothing for long-term investors to worry about for the time being.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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