Monday, March 11, 2013

Gold Miners - No Growth in Production

The chart below show the trends for 7 large gold mining companies.  Gold production is down 2% CAGR from 2010 to 2013E despite dramatic increases in capital spending and cash cost.  Cash costs are increasing because miners are processing ore with lower yields and that is more difficult to mine (e.g. deeper in the earth).

Capital expenditures includes both sustaining and exploratory.  Exploratory capital investment will take longer than 3 years to pay back in this long cycle industry.  However some of these investments should be paying off now. Some of these investments must be paying off as increased production.  However, its seems that old reserves are being depleted at the same rate since total production is slowly declining.

The estimates for 2013 come from management reports and presentations made at the beginning of this year.  A couple of the miners commented that production growth in 2013 is partly due to strikes in south Africa that depressed production in 2012 and will, presumably not hamper 2013.

Source: company reports and presentations.  Gold includes gold equivalent ounces for companies that report GEO.

As a gold bull it is reassuring to see that supply is limited.  Historically gold has been a good deposit of value because supply growth was limited.  That remains the case even with 21st century technology.

Companies that can grow production earn a premium valuation, in an industry with slow growth.  My current research efforts are focused on identifying gold miners that are growing production.

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