Sunday, 29 September 2013

Gold mining: the fading away of an industry...

The protracted downtrend of precious metal prices may have run its course, there is however no clear indication of much higher gold and silver prices in the near or medium term future.  Gold is moving sideways, unable to uphold $1400 for more than a few days.  Producers are scrutinizing their mining sites and not without reason. Production at mines with high total production costs may need to be scaled back.  Any new mining development will need to factor in lower gold prices going forward and the internal rate of return will be substantially lower.  Especially on sites where investment costs have been spiralling out of control, tough decisions may have to be made.  It should be clear that, under these circumstances, the global gold mining output will continue its decline, possibly at an accelerated pace.  Gold mining: the fading away of an industry...
In these circumstances it is increasingly difficult to make any money investing in this sector. The "believers" may financially survive only when factoring in the above observations in their capital allocation:
1.       Producing mining companies with low total production costs definitely are worth the extra to be paid (in terms of value per ounce of reserves or ounce produced).
2.       A decent alternative are the established streaming companies, having a revenue stream depending on precious metal prices, but avoiding most specific mining risks.
3.       Among explorer developers, it should be emphasized that only those with real world class deposits may thrive, provided they have the business oriented management team that may find capital at minimum dilution, keeping shareholders happy.
The days of expensive acquisitions of explorers by mining majors are behind us. Acquisitions tend to be more lucrative for the mining companies lately.
The past week we had losses alternating with gains. Miners seem unable to set down a winning streak since quite a while. On balance gold added a modest 0.8% over the week, while silver didn't even uphold: -0.09%. The HUI index (basket of 16 unhedged gold stocks quoting on US markets) however lost another 1.23%, making the HUI/Gold ratio slide to 0.172, challenging its June 26 minimum (0.169).
HUI relative to gold is monitored on a weekly basis on the “GoldMinerPulse” blog page.  The graph below shows the situation by September 27 (at market close).

HUI index relative to gold, daily observations over 6 months ending on September 27 (click to enlarge) 
A detailed performance analysis on miners included in the GoldMinerPulse database, is found on the page "miners performance". The miners included in the database are classified in five performance quintiles. This allows evaluating how individual miners went down with the herd... or withstood the tempest.

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