Is the gold market broken? While the demand for physical gold continues to rise and supply keeps falling, the freely traded price of gold continues to slide. With this being the case, it would seem that the gold market is heading for a reversal, making industry-leading miners such as Barrick Gold (GOLD 0.03%) and Newmont Mining (NEM 0.04%) as well as industry leader by market capitalization Goldcorp (GG) look attractive.
Demand exceeds supply
Currently, I'm not much of a gold bull. However, developments in the gold market are starting to make me think otherwise. First, gold stored at Comex, the leading bullion storage house for futures traders, has reached such a low level that there are now more than 112 owners per physical ounce of gold stored in Comex's vaults. Now, I should mention that this figure includes paper claims to gold, like derivative contracts, but the figure is still significant.
Secondly, there are huge amounts of physical gold flowing into China through Hong Kong and Shanghai. This is nothing new, but the volume of gold flowing into China has reached record highs in recent months. There is also a 500-tonne gap in China's gold-consumption data -- that's right, 500 tonnes of gold has gone missing. In dollar terms, that translates into about $23 billion worth of gold. There is speculation that the Chinese central bank has been swallowing excess demand, panic buying, and stockpiling .
Taking these factors into account, I'm looking to invest in the gold mining sector as demand for the yellow metal continues to rise. To limit my risk I'm only looking for industry-leading, low-cost producers boasting high quality assets.
Working hard but progress is slow
Barrick has actually made some really great progress trying to restructure its operations during the space of the last year. For example, the company has reduced capital spending and operating costs by about $2 billion and announced agreements to divest six high-cost, non-core mines and other assets for a total consideration of almost $1 billion. The most recent move by Barrick to streamline and reduce costs was the divestment of the company's 33.3% interest in the high-cost Marigold mine, which is jointly owned with Goldcorp.
Nevertheless, according to Barrick's management, production is expected to fall and costs are expected to rise over the space of the next year. The combination of rising costs and falling production is concerning, as it implies that despite attempts to restructure, Barrick is failing to turn itself around.
Management currently predicts that Barrick's all-in sustaining cost of production per ounce of gold produced is expected to be in the region of $950 during 2014. In comparison, the company's AISC of production per gold ounce during 2013 was $938, falling to $918 during the fourth quarter of 2013. Furthermore, Barrick's gold production is expected to fall to 6.5 million ounces at the high end for 2014, 10% below 2013 production of 7.2 million ounces.
Still, despite Barrick's failings, the company's size means that it's likely to report a significant rise in profitability if the price of gold surges due to undersupply.
While Barrick is struggling to improve its performance, Newmont has actually made a good start reconfiguring its operations. Newmont revealed that it had divested $600 million of non-core assets throughout 2013. Additionally, the company revealed that gold production for 2014 was going to be in the region of 5 million to 5.3 million ounces, compared to 5.1 million ounces during 2013. The company is also targeting an AISC per gold ounce of $1,075 to $1,175. This AISC figure is below the $1,100 to $1,200 figure reported for 2013. Cost cuts continue elsewhere, as Newmont is planning on reducing operating expenses by 20% throughout 2014.
All of this is good news -- falling costs and rising gold production are great for profitability in the long term.
Best of breed
One company that has been behaving itself is Goldcorp, and for this the stock has been rewarded. Goldcorp has kept its spending and expansion plans under control during the past few years, and as a result the company is much more efficient than its larger peer Barrick.
Goldcorp's AISC for 2013 was $1,031 per ounce, higher than that of Barrick but lower than that of Newmont. However, unlike Barrick, Goldcorp is predicting that its AISC will drop to less than $1,000 per ounce during 2014; gold production is also expected to increase around 15% for the year -- impressive growth.
Additionally, Goldcorp has sold its holding in the Marigold mine, jointly owned with Barrick as mentioned above. Goldcorp expects costs to drop following this divestment and will update the market once the deal is closed in April.
All in all, it would appear that the gold price is due for a sudden correction based on the fact that demand continues to exceed supply. However, investing in the resource sector can be risky; I feel that the best way to play this gold shortage is via the industry leaders, Barrick, Newmont, and Goldcorp, as they are all well placed for a gold price rebound.