Even if you struggle with the idea of gold being a valuable commodity despite having limited practical use and not producing any income, it can't be denied that it has stood the test of time.
Demand for gold is no mere fad, and given the current price of many gold producing companies, adding a gold miner to your portfolio could add a positive contribution over a longer period.
So which one should you buy today? The ideal gold miner is one with the lowest possible costs to maximize profit margins and which is growing, or has at least maintained, production. Using the World Gold Council's measure of 'all-in sustaining costs' I have compared five companies that have reported this figure.
Critically for investors, 'all-in sustaining' costs level the playing field between miners by taking into consideration the different corporate structures and over-heads each company has.
|
Company |
All in sustaining cost per oz, June quarter |
All in sustaining cost per oz, September quarter |
Change in cost (%) |
12-month share price change (%) |
| Newcrest Mining (NCM) |
$1,283* |
$1,093 |
-15% |
-58% |
| Silver Lake Resources (SLR) |
$1,347 |
$1,098 |
-18.4% |
-77% |
| Northern Star Resources (NST) |
$1,098 |
$996 |
-10% |
-29% |
| Kingsgate Consolidated Limited (KCN) |
Not available |
US$1,223 |
– |
-70% |
| Endeavour Mining (EVR) |
US$1,038 |
TBA |
– |
-67% |
Source: Company reports and announcements. *June quarter not reported, but FY 2013 average used.
With the price of gold currently sitting at $1,408 per ounce the aggressive cost reductions made by miners earlier in the year have quickly flowed through to reinforce earnings.
Silver Lake Resources (ASX: SLR) has been one of the most stringent in its cost reductions, with all-in sustaining costs slashed by 18.4% in the September quarter. This has not come at the expense of short-term production, which was up 7% to a record 59,900 oz.
After taking a battering in share price, Newcrest Mining (ASX: NCM) has cut back costs by around 15% to just below that of Silver Lake. Newcrest's production for the September quarter was down 9% on the June quarter, but is up 26% on September 2012.
Northern Star Resources (ASX: NST) is the standout of those listed, with the lowest all-in sustaining costs and the smallest drop in the company's share price in the last year. To add fuel to the Northern Star fire, gold recovered for the September quarter was up slightly (2.3%) on June quarter, but at a 7% higher grade.
Since there has been no real negative impact on production, despite the cost cutting, it highlights that the reductions were more weighted towards corporate and overhead costs, as well as exploration costs. The impact of this will be slower long-term growth, but higher short term cashflows to keep the company's buoyant.
Foolish takeaway
Northern Star Resources looks to be the favourite from strictly low-cost perspective with Silver Lake Resources close behind. However Silver Lake Resources also has strong potential to increase production over the long term and after a September capital raising to prop up its balance sheet, looks to have bright future prospects.
