Gold's Dark Underbelly

Despite incessant calls for the dollar gold bullion price to continue rising – something that it’s done for nearly a decade – investors are showing increasing fatigue in the gold equities arena; sentiment is at best neutral. There are roughly 500 gold stocks listed across the world, with an aggregate market value of about USD 250bn, currently showing equity prices that have retraced to levels seen about a year ago.

Looking at NYSE prices, Canada-based Barrick, the world’s biggest primary gold producer, by output and by value, is trading just under USD 43/share, a level it first breached in 2007. It would go on to make all time record highs around USD 53/share in 2008, leaving buyers at that level in the shade today.

The price made a decisive attack on USD 50/share in early December 2009, when gold bullion traded at record nominal levels just above USD 1,220.00 an ounce. Earlier this week, bullion pierced through the USD 1,190.00 level, but equity investors don’t appear to be impressed.

US-based Newmont, the No 2 gold producer by output, is currently trading just above USD 54/share, a level it first broke through in 2003; it would top USD 60/share in early 2006. Goldcorp, the No 2 gold producer by value, is currently trading just short of USD 43/share, a level it first saw early in 2008.

By almost any conventional metric, even at current levels, listed gold stocks continue to be priced at premiums to other mining stocks, a tradition that has long been in place, and one that could be testing its limits. The long term bull market in gold has been wonderful for the revenue line of gold diggers, but costs have risen in every department, and gold companies have been building new mines on deposits that may have been classified as marginal in years gone by.

More cash comes in, but loads of it is being burned up. Most gold miners have for years trained investors to focus on “cash costs”, which may be seductively low in a good number of cases, but which, at the same time, tell only part of the story. Detailed hard core financial statements published by the same gold companies show that, in the case of the biggest ten in the world, USD 14bn in equity has been raised over the past three calendar years. The main reason is that these big gold miners have been struggling to produce genuine free cash flow, being operating cash flow less capital expenditure.

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