Gold Miners Face Transitions


"Gold stocks, are not for the faint hearted, or the inexperienced."

Over the past decade, the dollar gold bullion price has increased nearly fivefold, suggesting that gold diggers would by now be reporting stellar profits and cash flows. But numbers produced by the world's biggest gold miners for the first half of 2010 tell a mixed story.

The gold miners have produced more free cash flow for the first half of 2010 than for 2009 as a whole. This is good news, but there are at least two key concerns. The first is that costs are increasing, both for daily overheads such as wages and power, and for capital expenditure—both for stay-in-business, and for new mines.

There was a marginal slow down in the first half of this year, with the total running at just short of $4 billion. As "pure gold" deposits become increasingly difficult to find, gold miners are moving into mines which produce gold on the side, most typically, copper porphyries. These are costly mines to build.

Gold miners naturally highlight the gold portion of mixed production. Thus Goldcorp Inc. (NYSE:GG; TSX:G), which has recently completed Peñasquito, a very big and expensive mine in Mexico, highlights significant gold production, but the mine is mixed, with material output of lead, zinc, and silver.

However, gold miners increasingly leaning into base metals production can potentially breathe cash flow like a dragon, given a robust mix of commodity price levels.

"Gold bugs," a loose descriptor for a class of speculators and investors which apparently believe that gold bullion prices will simply continue increasing year after year, as in the past decade, underpin the significant premiums built into the value of listed gold producers. Gold and gold stocks are not for the faint hearted or the inexperienced.

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