Are Newcrest Mining Limited and AngloGold Ashanti Limited a buy now?

Lower costs and higher gold prices are widening potential earnings spreads.

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Gold has risen about 15% since its December low of US$1,182/oz. Inflation concerns and geopolitical events like what’s happening in Ukraine and the Crimean peninsula may be affecting gold. China, the world’s largest consumer of gold, may be buying up more as well.

The market is pricing the gold mining companies based on the asset value of their gold resource reserves. When gold declines, gold miners’ share prices can fall rapidly. When gold rises, they can go up at a quick pace.

These two gold miners are adapting to the new challenges by improving their businesses and cutting costs.

AngloGold Ashanti Limited (ASX: AGG) reduced its all-in sustaining cost from US$1,251/oz to US$1,174/oz, building in a buffer should gold weaken. The savings are from halving corporate costs and reducing exploration costs by focusing on three core regions.

Its Tropicana mine, set to be the fourth-largest gold mine in WA, was officially opened by the company and its joint venture partner Independence Group NL (ASX: IGO). It already produced 95,000 oz after its first operating quarter and is expected to produce about 500,000 oz in its first three years.

With the commissioning of the Tropicana mine and one other mine, annual production will increase for the first time in 10 years.

The company said that it is expecting gold prices to go back under US$1,300/oz. Its guidance for 2014 is for its all-in sustaining cost to drop to US$1,025/oz – US$1,075/oz. Production volumes will rise to 4.2 million-4.5 million oz.

Newcrest Mining Limited (ASX: NCM), the largest gold miner listed on the ASX, has cut its overall all-in sustaining cost down to US$857/oz in the quarter ending in December. That’s lower than most of the major world producers.

The company said the lower cost is from projects moving to operations, increased production of higher grade gold ores and focusing on cost reductions. In addition, the weakening Aussie dollar has helped lower the US$ denominated all-in sustaining cost.

It pushed production up 27% in the first half of FY2014 to 1.2 million oz.

Foolish takeaway

Since gold is a commodity, these companies have no direct control over the spot price. However, they are making the right moves by lowering costs, improving productivity and increasing production. That’s a sign of good management.

If gold continues to climb, these two companies can look forward to better revenues. Investors will need to see that gold ore grades don’t slip because that will affect gold production.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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