From a high point near $1,900 an ounce reached in August of 2011 -- and a more recent high near $1,800 last September -- gold prices have plunged to something like $1,400 an ounce in June 2013. From top to tip, the value of an ounce of pure gold has lost almost precisely 25% of its value, and the value of a share of the SPDR Gold Shares ETF (NYSEMKT:GLD) is down 23%.
Will gold fall further? I don't know. In fact, as I recently argued online, I don't think anybody knows how far gold will fall, how far it might rise, or even what the shiny stuff is worth. But I do know which gold mining stock is in the best position to keep earning profits if gold prices drop -- and to earn even more profits if gold prices stabilize or improve: Barrick Gold (NYSE:ABX).
All-in on gold
How do I know? From a recent report on visualcapitalist.com, that's how. You see, crunching the numbers on gold mining companies, starting with the cash costs these companies incur in digging yellow rocks out of the ground, and continuing through to calculate the "all-in sustainable cash cost" of mining an ounce of Au, visualcapitalist has come up with a report of which miners operate most efficiently. And this leads directly to a conclusion of which gold stocks can earn the most profit from producing gold.
Here are the results:
As visualcapitalist explains, it's important to know the all-in cash cost a company incurs in producing an ounce of gold. This is because the cost of mining is directly responsible for the company's ability to generate free cash flow -- or not.
Today's high cash-cost of digging through 9.4 tons of dirt in hopes of extracting a golf-ball's weight of pure gold explains why most of the major gold miners -- from low-cost producer Barrick, all the way up through Kinross (NYSE:KGC), Newmont (NYSE:NEM) and Goldcorp (NYSE:GG) -- are currently in a negative free cash flow state. (Well, the high cost plus the relatively lower prices that miners are getting for their gold today).
That being said, the large scale of Barrick Gold's operations -- $14.3 billion in annual revenue, or 50% bigger than No. 2 Newmont -- gives the company an advantage in cost of production. That advantage is further compounded by the company's focus on North American operations, where according to visualcapitalist, cash costs of mining are lower than anywhere else in the world -- $598 per ounce, versus, for example, the $957 per ounce price tag that's the cheapest cost in Africa.
Mining gold is not a great business these days. In fact, the high costs inherent in these operations make me think the business isn't that great, period. (I don't think it's any accident that even Barrick, despite all its advantages, is currently unprofitable and carrying $12.5 billion in net debt).
That said, if you're dead set on investing in gold, and gold mining stocks in particular, it only makes sense to focus on the company that's got the most advantages working in its favor. That stock's name is Barrick Gold.
Fool contributor Rich Smith 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.