Should you invest in ASX gold stocks now?

There’s been a dramatic shift in the landscape of Australia’s gold mining industry in the last 12 months. As the price of gold retreated from historic highs, Australia’s listed gold producers started slashing costs to maintain profit margins. They also wrote down billions in the value of assets!

Many Australian investors (and traders) were caught by surprise and started to dump ASX gold stocks in response. The feverish ‘gold rush’ of the previous few years turned to panic, and the share prices of gold producers have been savaged. Newcrest Mining (ASX: NCM), for example, has lost some 70% of its market capitalization as of this writing, while Silver Lake Resources (ASX: SLR) has lost 77%.

A new wave of production coming

In spite of the huge falls, Australian gold producers are arguably heading into one of the strongest periods of production for years! This is because the rocketing gold price in the preceding three years spurred a massive wave of investment across the industry to increase production.

In fact, the surge of investment has resulted in Australia rocketing from to the world’s fourth largest gold producer in 2008 to the world’s second largest producer in 2012, according to the World Gold Council.

With this production coming online, investors with a stomach for volatility and a long-term time horizon could pick up ASX gold shares at bargain prices.

What are the pros and cons of investing in gold producers?

Pros

  • Rich natural reserves
  • Australia holds about 10% of the world’s economic gold resources – third only to South Africa and USA. This rich vein of resources supports the industry and its continued growth.
  • Australia produced 8.7% of the world’s supply in 2012 and, according to a presentation by Newcrest Mining, gold is the country’s third largest export after iron ore and coal, worth $15.5 billion.
  • Big production growth
  • The hefty investment made by gold producers in exploration, acquisitions and mine expansions over the last three years has resulted in production growth which will continue into FY14 for many companies. This increase will help offset lower profit margins, but will also help to catapult earnings if the price of gold starts to rise again.
  • Time tested
  • Investment in gold has stood the test of time. For centuries it has been used as a medium of exchange and more recently as a hedge against inflation. Despite limited practical applications it is engrained in society as a symbol of value.

Cons

  • High cost base and remote locations
  • Australia is notorious for the high costs of production. This is compounded by the remote locations of gold mines, particularly in Western Australia. These are costs that are difficult to reduce and limit profit margins.
  • Volatility and cyclical demand
  • The share price of gold producers currently fluctuates daily in line with gold prices and if the gold price weakens they could fall further.
  • Gold has been called a counter-cyclical investment, so when stocks are doing well, gold does poorly (and vice-verca). This is very much a reflection of the current environment; with gold stocks falling along with the gold price, while the S&P / ASX 200 Index (Index: ^AXJO) (ASX: XJO) has advanced 20% in the last 12 months. This makes a long-term perspective essential when evaluating gold stocks.

What are the prominent publicly traded Australian gold miners?

Excluding the large diversified resource companies BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO), the Australian gold production landscape is comprised of two larger producers and a handful of medium-sized producers.

Newcrest Mining (ASX: NCM) is the biggest listed gold miner, with a market cap of $7.61 billion as of this writing.

 

Company Market Cap Annual production (FY14 forecast)
Newcrest Mining
(ASX: NCM)
$7.6 billion FY13 2.0 – 2.15 million oz
FY14 2.0 – 2.3 million oz
Regis Resources
(RRL)*
$1.7 billion FY13 253,090 oz
FY14 333,000 – 368,000 oz
Evolution Mining
(EVN)
$575 million FY13 392,920 oz
FY14 400,000 – 450,000 oz
Northern Star Resources
(NST)
$345 million FY13 88,614 oz
FY14 100,000 – 115,000 oz
Silver Lake resources
(ASX: SLR)
$320 million FY13 151,296 oz
FY14 180, 000 – 200,000 oz
Kingsgate Consolidated Limited
(ASX: KCN)
$215 million FY13 199,897 oz
FY14 190,000 – 210,000 oz

Last updated November 2013. *19% owned by Newmont Gold. 

Cost-cutting measures taken to date and growing production will help to bolster balance sheets go gold producers as they hunker down for the cyclical down turn faced being faced by the industry.

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