2012年8月28日星期二

GOLD MINERS WILL NEED $3,000 IN FIVE YEARS TO BE PROFITABLE

The nitwits on MSM and CNBC who believe that gold is in a bubble, fail to understand that a large percentage of its recent price move higher has been due to the increased costs in the mining industry — and not because of rampant speculation.
This reminds me of a famous quote from the movie Aliens… “DID IQ’S JUST DROP SHARPLY WHEN I WAS AWAY?”
If we look at the information and data provided in the body of this post, you will realize that the price of gold will have to head much higher just to cover increased mining costs.  Furthermore, you don’t have to believe me… the title of this post came from an article quoting the World Gold Council’s chief executive, Aram Shishmanian.
Back on May 14th of this year Aram Shishmanian of the World Gold Council stated:
Miners currently needed a gold price of $1,300 to survive, Shishmanian said, but faced steep rises in mining costs, along with the cost of dividends and host nation taxes.
“If this continues for the next five years the gold price needs to be at least $3,000 just to stay in the business,” he said.
(article found at the link HERE)
This statement comes from one of the very organizations who has been blamed for supposedly being a part of the grand conspiracy to manipulate gold.  While I do believe manipulation is taking place in the gold and silver markets, one would wonder why on earth would they allow Shishmanian to make such a statement??…LOL.
Even though Shishmanian comes out with this startling main-stream forecast for much higher gold prices, he does not offer much in the way of detail.  This is where Nick Holland comes into the picture.  Nick Holland is the CEO of Goldfields, a gold mining company based in South Africa — the fourth largest primary gold producer in 2011.  Holland is a bit of a maverick in the gold industry.
Holland spoke at the Melbourne Mining Club on July 31, 2012 from his presentation “What do Investors want from their Gold Mining Stock?“  Holland basically calls a spade a spade as he shows how lousy the top gold miners have performed and why their stock prices have suffered.
I have taken what I believe are the four most important charts from his 35 page presentation and have posted them below with commentary.
The first chart deals with two of my favorite subjects in gold and silver mining industry:  Falling Ore Grades & Increased Costs.


In this chart (on the left), we see that the operating cost per tonne of gold has gone up 12% per year, while the top 8 gold miners average gold yield has declined 5% per year.
According to Holland:
What I thought was scary is that they were predicting — and this is just on a cost per tonne basis — that cost inflation was probably going to be 15% per annum going forward.  This means you’re going to see a doubling of costs over five years.
If we look at Goldfields average gold yield since 2005, it has fallen from 2.74 g/t to 1.83 g/t… or a 35% decline in 6 years.

As I have mentioned several times before, as ore grades decline more diesel is consumed just to produce the same or even less gold.  Below we see that Goldfields has doubled their diesel consumption per ounce of gold since 2005.

Just to give a frame of reference, in 2005 Goldfields produced 4.2 million oz of gold and only consumed 4.9 gallons of diesel per ounce in the process.  By 2011, their gold production declined to 3.5 million oz but they increased their diesel consumption  to 10.6 gallons per oz of gold.
I have received emails from people telling me that the increased cost of diesel is not that much of a factor compared to the increase of the gold price.  While I agree with this assessment, it’s not the price of diesel that concerns me the most, but rather the availability.   I would imagine both the escalating price of diesel on top of future shortages may cause more havoc in the industry than few have considered.
The next chart reveals the sobering truth that the percentage of CAPEX spending per ounce of gold by the top 8 gold miners has far outstripped the increase in the price of gold.  (CAPEX means capital expenditures or money spent on capital investment).

If you look at the chart above, you will see that even though the price of gold has risen 20% per annum over the past 10 years, CAPEX spending has increased 32% per ounce of gold.  Furthermore, Holland states that CAPEX spending has increased a staggering 50% per year between 2006-2011.
This brings us to the next chart that shows the past and future trends for CAPEX spending in the top 8 gold miners.

From 2006-2011, the top gold miners spent 40% or $54 billion of their market cap (average of $137 billion).  If all the projects that are slated to come online between 2012-2017, the top gold miners will have to spend $85 billion or 60% of their present market cap.  This goes to show that increased costs of mining and investment are really devouring the profits of the gold miners.
One more interesting trend to take note from the chart above is the average market cap.  The average market cap of the top gold miners was $137 billion between 2006-2011.  In 2012, it has fallen to only $135 billion even though the price of gold has increased 20% per year since 2002.
This is part of the very reason why Nick Holland made the 35 page report and presented it to the world.  He believes the top gold miners have been BLOWING A GREAT DEAL OF HOT AIR, but not backing it up with results.  Some have mentioned (such as Jim Sinclair) that the reason why the top gold miners stock prices haven’t performed is due low dividends paid to its shareholders.
The final chart below compares the dividend yields from different sectors of the market.

Here we can see that the top gold miners dividend yields are nearly half compared to the overall mining sector and the S&P 500.
Again….according to Holland:
I’ve been asked by some investors why we can’t pay out a dividend yield of 5% to 10%?  If we really want to get our stock up we’ve got to push dividend yields into those territories.  But we simply can’t do that, because then we will be paying out all of our earnings.  We won’t have anything left for sustaining capital or maintaining our current production base.
We have to Holland credit where credit is due.  Goldfield’s current dividend yield is 3.8%, more than twice the 1.8% average of the gold miners in its same class.
CONCULUSION 
There is so much miss-information and lousy analysis in the market that investors have become disenfranchised with the gold mining industry.  You can’t really blame them as the top gold miners have not been honest with the real costs to mine gold.  Instead they have been bragging about their huge profit margins per their cash costs.  This has motivated governments in foreign countries to increase or tack on higher royalties and taxes.
The top gold miners have basically shot themselves in their own foot due to their arrogance and stupidity.
Cash costs are a complete joke.  Anyone who still looks at that financial component is completely ignorant to the overall forces at work in the gold mining industry.  Costs are increasing exponentially as Nick Holland has presented in his recent report.
Even though Holland provides a sobering picture of the increased costs and CAPEX spending in the gold industry… I believe the future may be even more bleak when it comes to available liquid energy and affordable prices.  This is by no means a bad thing for the price of gold and silver, but rather quite bullish.  However, it will making the selecting of mining companies more difficult going forward.  This is where I see the overall gold and silver community totally ignorant.
That being said, we can now see that if operating costs and CAPEX are going to increase more than they have in the past, the price of gold will have to head  up much higher from here…..JUST TO KEEP IN PACE WITH THIS INFLATION…..FORGET ALL THE OTHER BULLISH FACTORS….lol
Got Gold?
To check out Nick Hollands full 35 page report go to the link HERE

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