It has been a miserable year for gold bulls and the gold miners themselves, with the yellow metal suffering its worst decline in a decade. Since the year began, gold prices have dropped close to 28% and are now off 36% since hitting a high of $1,888 an ounce in August 2011.
The impetus for the recent drop in the price of gold is the imminent paring back of the Federal Reserve's monetary easing policy known as QE3. This policy allowed the Fed to purchase $85 billion each month in a combination of long-term Treasury bonds and mortgage-backed securities, and it also gave gold optimists comfort that their money-printing hedge would maintain its value or even head higher. With QE3 set to end sooner rather than later, and margin requirements on owning gold spiking because of volatility, bulls haven't been able to head to the exits fast enough.
In spite of these concerns, I still feel very confident about the future of gold prices. Previously, I listed five reasons I thought gold was a screaming buy, and I still consider each and every one of these reasons valid today. I also have absolutely no intention of selling any of my commodity-based holdings in my personal portfolio.
While gold at $1,200 an ounce will certainly make it difficult for some gold miners to operate profitably -- such as in Africa, where labor costs and political unrest made it challenging even when gold was north of $1,700 an ounce -- four miners stand out as being ahead of their peers in their ability to survive and even thrive in this depressed gold environment.
Yamana Gold (NYSE:AUY)
This isn't to say that Yamana hasn't felt the pain of gold's descent, because shareholders are definitely feeling the pain with the share price off 57% from its November intraday high. However, Yamana Gold is the best gold miner among its peers from a statistical standpoint.
Yamana's byproducts, consisting primarily of copper and molybdenum, helped offset the costs of its gold mining, dropping its cash operating costs to just $383 per gold-equivalent-ounce, a fraction of its peers, in the first quarter. Further, Yamana's all-in sustaining cost -- a measure of its operating costs as well as its sustainable costs to keep up production -- was only $856/GEO. Despite few miners expanding production in lieu of weak gold prices, Yamana also increased production its Mercedes and Minera Florida mines by 53% and 38%, respectively. Spot gold prices would have to fall considerably before Yamana's profitability is to be compromised.
Goldcorp may no longer be the historical low-cost leader when it comes to mining, ceding that title to Yamana, but it still has the tools to outperform its peers with gold at $1,200/oz.
In Goldcorp's most recent quarter it delivered cash operating costs of $565 per gold equivalent ounce, with all-in sustaining costs of $1,135 an ounce. Even with gold prices depressed, Goldcorp delivered $400 million in operating cash flow. Like Yamana, Goldcorp's grandiose secret is that its mines are flush with byproduct metals, like silver, copper, lead, and zinc, which it can sell to offset the costs of mining gold. The company's most lucrative mine, Penasquito, still has approximately 15 million ounces of proven and probable reserves yet to be unearthed and is based in Mexico, a country known for reasonably cheap labor costs in the mining industry. Even though I consider Yamana to be more attractive than Goldcorp, there's little reason Goldcorp can't thrive, even now.
Royal Gold (NASDAQ:RGLD)
One of the smartest, yet also riskiest, ways to play a drop in gold is to invest in royalty interest companies. With their margins tied directly to the rising and falling price of gold, royalty interest companies such as Royal Gold are certainly not for the faint of heart -- but they also come with certain advantages that traditional miners can't offer investors.
For one, Royal Gold's obligation ends with its cash investment into a mine. In return for its royalty interest in a mine's production, Royal Gold has no other prevailing costs. That means mine upkeep and expansion beyond its initial investment isn't its concern. Royal Gold has a well-diversified portfolio of royalty interests, consisting of 36 developed, and 22 in-development, mines. With low-cost purchase deals in place and essentially few corporate expenses, it'd take a huge drop in gold prices to affect Royal Gold's profitability.
Silver Wheaton (NYSE:SLW)
It's an often forgotten about name, when it comes to gold mining since most investors will focus on its multiple silver contracts, but mining royalty interest company Silver Wheaton is another attractive investment.
Like Royal Gold, Silver Wheaton supplies cash upfront to silver and gold miners that don't have the appropriate capital needed to build out their mines. In return, Silver Wheaton locks in long-term contracts that allow them to purchase some, or all, of the produced silver and gold at a rate that's extremely attractive relative to current prices. Last year, Silver Wheaton pulled the trigger on a deal with HudBay Minerals (NYSE:HBM) for $750 million, which will allow it to purchase 100% of the gold production of HudBay's flagship 777 mine through at least 2016, and then 50% of the remaining gold throughout the life of the mine thereafter, at an averaged fixed cost of just $400 an ounce (which is subject to an inflationary adjustment).
A bump in the road
Gold has clearly hit a bump in the road, but reasons to expect a rebound are still readily visible. Whether it takes weeks, months, or perhaps even years, for gold to find its footing, these four miners are unlikely to face any profitability pressures or much more downside in my opinion.