As a long-term investor I like to imagine the companies I own today will grow like seedlings from their current state to thriving, blossoming trees in 20, 40, or even 60 years’ time. So can Newcrest Mining Limited (ASX: NCM) and other gold miners with finite gold reserves, like Evolution Mining Limited (ASX: EVN) and Resolute Mining Limited (ASX: RSG), be a winning investment for my long-term portfolio?
Currently Newcrest Mining has a gold reserve life of 33 years based on its current annual production. It is one of the longest gold reserve life’s around, but it also means that for the company to keep growing, or even producing gold beyond this time, Newcrest will have to obtain additional sources of gold by exploration or acquisition.
As the company itself points out in presentations, new significant gold discoveries are becoming increasingly rare, while the cost involved in exploration and discovery has grown significantly over time.
The implication here is that gold companies will be subject to ever increasing capital expenditure requirements. This contrasts to the finite reserves of energy companies which, thanks to new technologies, have kept exploration and extraction costs down.
It is a point understood well by growing gold miner Northern Star Resources Ltd (ASX: NST), which recently took up the opportunity to acquire several gold mines from Barrick Gold Inc (NYSE: ABX) on the cheap. The acquisitions significantly lifted Northern Star’s resources and reserves and helped push the company on to the path of producing 200,000 ounces per year.
On the flip-side, gold miners do have the potential to produce superior returns and high margins in periods where the gold price rises strongly, as it did between 2009 and 20012. However the uncertainty around gold prices and economic cycles over the long term makes it a guessing game.
Gold miners are tricky because they suffer from both short-term volatility and long-term uncertainty. Newcrest Mining has one of the longest reserve life’s around, but the increasing difficulty and cost of growing gold reserves means that rather than long-term investments, I would limit my exposure in gold miners and consider it as short-term speculation.
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Motley Fool contributor Regan Pearson does not own any shares in any of the companies mentioned in this article.