Analysts have lowered their expectations on short-term gold price from $1,375 per troy ounce at the beginning of the year to $1,300 per troy ounce.
There isn’t any doubt that the recent decline in the dollar, expectations on slowing down the Fed’s future interest rate hikes as inflation remains low and the persistence of uncertainty as long as the U.S. administration goes on its political and economic program are all supportive factors to gold.
But as investors are showing to be more defensive on U.S. Treasury Inflation-Protected Securities (TIPS), where they see more potential than in the yellow metal, analysts are today less optimistic on gold than a few months ago.
Having said that, with gold likely not breaking $1,300 per troy ounce over the next trading months, I would suggest investors who are interested in getting exposure to the precious metals and who are buying shares of the mining companies that are traded on the U.S. stock markets, to invest in the most known Canadian miners and the biggest in the gold stock industry such as Barrick Gold Corp. (ABX, Financial), Newmont Mining Corp. (NEM, Financial), Goldcorp (GG, Financial), Agnico Eagle Mines (AEM, Financial) and Kinross Gold Corp. (KGC, Financial).
If I had to choose between the aforementioned miners, I would invest in Barrick Gold and Agnico Eagle Mines, two of the companies that in the industry are characterized by one of the lowest all-in sustaining cost (AISC) per ounce of metal sold and one of the best assets base.
When I screen for gold mining companies, I like to look at two of the key determinants of the miner’s economics: the average grade, which measures the concentration of the precious metal that is contained in one tonne of mineral or ore, and the total amount of those mineral resources that are in the company’s reserves. The latter are mineral resources that either have already been proven to be economically mined or which economic viability can be proved.
I prefer those miners such as Barrick Gold and Newmont Mining that have among the highest amounts of proven and probable gold reserves, and those miners like Agnico Eagle Mines that have one of the highest average ore grades in the industry. Having a high average ore grade is not only beneficial to the company’s economics –Â because extracting gold from higher ore grade deposits significantly reduces costs –Â but also under a point of view of flexibility of operations: when the miner’s assets base is characterized by a high average ore grade, the mining company has more margin to maneuver in adjusting the production to changes in the price of the commodity with less impact on their profitability. When gold trades lower because the gold demand decreases, those miners that are more flexible at operations can lower the overall production to meet the demand by significantly reducing production at costly mines and slightly increasing the production from those deposits that have a higher average ore grade.
Agnico Eagle Mines and Barrick Gold have proven to be more flexible at operations than their peers; Barrick Gold and Newmont Mining have a considerable amount of reserves that can secure operations for a lot of years to come.
Investors should also take into consideration the impact that a lower dollar versus local currencies will have on the mining companies’ economics. I would suggest investing more decisively on those miners whose operations are mostly located in North America.
Finally, don’t neglect the precious metal price that has been assumed for the determination of the miner’s reserves. Because those miners such as Barrick Gold and Agnico Eagle Mines that have defined their gold reserves at two of the lowest gold prices in the gold stock industry, can mine the metal at profit from their reserves already starting from a gold market price per troy ounce of $1,000 to $1,150.
Therefore, with gold expected not to break $1,300 per ounce on the London Bullion Market, I would avoid those midtier gold producers like Iamgold Corp. (IAG, Financial), which market value can only be significantly and positively impacted when the uptrending bullion breaks approximately $1,350 or more per troy ounce and can persist on those levels long enough. Let’s say for at least a quarter.
In addition, among the biggest gold producer I see a catalyst in the market value of Barrick Gold, and this is represented by its 63.9% stake into Acacia Mining, its gold producer and mineral properties explorer subsidiary in Africa. As you know Acacia Mining’s economics are being negatively impacted from the Tanzanian export ban on copper concentrate, and on a certain extent on Barrick Gold’s economics as well. Acacia Mining was accused by the Tanzanian government of underreporting revenue from the trade abroad of copper concentrate.
Barrick Gold is already in talks with Tanzania on the matter; if a resolution of the dispute is found, the share price of Barrick Gold may have a positive impact on the stock market.
Disclosure: I have no positions in any stock mentioned in this article.
