What Newcrest Mining’s 10-year low means for investors

Shares in Australia’s largest gold producer, Newcrest Mining (ASX: NCM), have sunk to their lowest level in a decade as the price of gold dipped to a four-month low and investor confidence evaporated. Newcrest shares dropped another 2.5% today to $8.85 per share, a price not seen since September 2003.

The fall brings Newcrest’s total drop over the last two years to 74%, a sad contrast to the 28% rise in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the same period.

Fellow gold miner Silver Lake Resources (ASX: SLR) was also walloped, down over 5% to $0.59 per share and just a short way above its 52-week low of $0.51, while Northern Star Resources (ASX: NST) was down over 3%.

The falls reflect continuing uncertainty and investor disappointment as the price of gold increasingly looks to be heading towards the US$1,200 per ounce level forecast by some analysts. In September Bloomberg reported that Morgan Stanley expected gold to fall to between US$1,200 and US$1,350 per ounce for the rest of the year before falling lower in 2014, while Citi Group issued a report forecasting gold bullion would drop to around US$1,145 next year.

For current investors in gold miners, this news suggests there is the potential for more pain to come. As the price of gold falls ever closer to the gold miners’ cost of production, even small dips are resulting in big share price falls.

For prospective investors trying to determine whether the falling prices mean there is a bargain to be found, a key measure to assess is a gold producer’s ‘all in sustaining cost’. This measure includes operating cash costs, royalties and corporate overheads and will help to determine if the company is able to make money off gold at a given price. The lowest cost producers have the best chance of survival.

Foolish takeaway

With no clear signs that gold prices will change tack any time soon, investors contemplating buying gold producers should be sure to pick those with the least risk and be prepared to hunker down for the potentially long storm ahead.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned.

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