by Luke Burgess, Investment U Research
Tuesday, March 6, 2012: Issue #1723
The gold mining industry is watching its production costs surge amid rising energy prices, inflation and increasing labor costs.
In 2012, Barrick Gold (NYSE: ABX), the world’s largest primary gold producer, says its total cash operating cost could increase 13% to 22%. Meanwhile, Newmont Mining (NYSE: NEM), another key gold stock, expects to see a 6%-to-14% rise in costs applicable to gold sales.
The industry is hoping that rising gold prices will buoy the hike in production costs. An annual survey of industry predictions by the London Bullion Market Association forecasts gold could top $2,000 an ounce this year.
The outlook – made by 26 leading precious metals analysts from the world’s largest bullion-dealing banks and trading houses – underscores bullish speculation of gold prices in the broader market.
All but two forecasters predicted that gold would surpass $1,900 an ounce this year, while 73% of those surveyed believe gold will top $2,000 an ounce.
Even though the expectations for gold prices are high, many of the larger gold mining stocks – including Barrick and Newmont – aren’t taking steps to significantly increase output in 2012. That’s partially because the gold industry has already ramped-up overall output over the past few quarters, and could be currently operating at near capacity.
World Gold Production Hits Record High in 2011
Global gold production increased nearly 4% last year, reaching an all-time high. According to the World Gold Council, miners pulled 2,810 tonnes of gold from the ground last year – that’s nearly 100 million ounces, worth over $170 billion at current prices.
The surge in output was a clear response to rising gold prices, which approached $1,900 an ounce last year. But historic mine production levels did little to depress gold demand last year – particularly due to intense buying from the world’s central banks, which purchased the highest annual tonnage in nearly a half century.
Central Banks Snap Up 15.5 Million Ounces of Gold in 2011
Global reserve banks were net sellers for decades. But over the past several quarters, gold sales from central banks have dried up. Meanwhile, the official sector in emerging markets is furiously buying the yellow metal to hedge the sovereign debt crisis in the United States and Europe.
Central banks were vigorously ramping up their gold reserves last year. In total, gold purchases from the official sector in 2011 swelled some 470% over the previous year.
Last year, the world’s central banks stuffed a total of 440 tonnes (15.5 million ounces) of gold in their vaults last year. The World Gold Council says this was the biggest bullion purchase from the official sector since 1964.
Experts believe it’s likely that central banks will continue buying gold, seeking diversification of their foreign exchange reserves. The World Gold Council reports:
“The trend in central bank buying is expected to continue given the lack of decisive action in dealing with the underlying issues in both Europe and the U.S., as well as low relative allocations to gold among emerging markets.”
For gold miners everywhere, renewed central bank interest in the metal bodes well, as global reserve banks have sufficient cash to make significant purchases. But for gold miners with plans to increase production, it’s even better news.
Yet, as I mentioned, many of the larger producers won’t be significantly increase production, partially due to the uptick in production in recent quarters. Nevertheless, there’s a handful of significant miners that do have plans to increase output in 2012.
And I contend that with global limitations in output increase from major producers – and now central banks positioned as serious net gold buyers – mining firms with increasing production are better positioned to leverage rising gold prices.
With that in mind, I’ve pulled out three significant gold stocks from the market that are expecting a significant increase in gold production in 2012.
Kinross Gold Corp. (NYSE: KGC)
Canadian-based Kinross Gold is one of the world’s top five gold producers. With operations that span four continents, the company produced 2.61 million ounces of gold last year, a 12% increase over the company’s output in 2010.
The boost in production helped fuel Kinross’ cash flow amid rising gold prices – firing revenue up 31% to nearly $4 billion last year.
For 2012, Kinross says that it expects to produce approximately 2.6 to 2.8 million gold equivalent ounces from its current operations.
Rising production costs have, however, cut into Kinross’ revenue over the past several quarters. Full-year production costs in 2011 averaged $596 per gold equivalent ounce, versus $506 per gold equivalent ounce for full-year 2010.
Kinross says production costs are expected to rise again in 2012 in the range of $670 to $715 per gold equivalent ounce. So the rise in production costs may offset rising revenue from increased production if the market sees weaker gold prices.
Kinross’ gold stock currently pays a semi-annually dividend. The company recently declared a dividend of US$0.08 per common share, payable on March 31, 2012 to shareholders of record at the close of business on March 23, 2012.
The company’s projects contain a total of 62.6 million ounces of gold reserves, plus an additional 43.7 million ounces of gold in the NI 43-101 measured, indicated and inferred resources.
Eldorado Gold Corp. (NYSE: EGO)
Eldorado Gold is a mid-tier gold mining company with significant production, development, and exploration stage properties and land positions in China, Brazil, Greece and Turkey. The company is noted as being the first North American company to successfully build and operate a gold mine in China. Production from Eldorado’s Tanjianshan Gold Mine in Western China commenced in 2007.
In 2011, Eldorado produced 659,000 ounces of gold – a 4% increase over the previous year. The company expects to ramp up gold production again this year to the tune of 730,000 to 775,000 ounces.
Rising production costs have also plagued Eldorado. Cash operating cost increased to $405 an ounce last year from $382 an ounce in 2010. The company says cash operating costs may rise again to $430 to $450 an ounce. Rising production costs may also cut into revenue from increasing output, save higher gold prices.
Eldorado’s gold stock also pays a semi-annual dividend. The company recently paid a dividend of C$0.09 per share on February 14, 2012. The next dividend payment information has not been announced yet.
Eldorado’s projects contain a total of 19.0 million ounces of gold reserves, plus an additional 31.5 million ounces of gold resources across all three NI 43-101 resource categories.
Yamana Gold Inc. (NYSE: AUY)
Yamana Gold is a significant gold mining, exploration and development company with projects in Brazil, Argentina, Chile, Mexico and Colombia.
Revenue exceeded $2.2 billion in 2011, as the company reached record production of 1.10 million gold equivalent ounces – a 5.3% increased over the previous year.
This year Yamana expects output to be in the range of 1.2 to 1.3 million gold-equivalent ounces – a 13% increase over 2011.
Going forward, the company says production is expected to increase to 1.5 to 1.7 million gold equivalent ounces by 2013, and 1.75 million ounces gold-equivalent ounces by 2014.
Yamana’s co-product cash costs increased 5% last year to $463 per gold equivalent ounce. The company has not yet announced a guidance of operational costs across all its projects for 2012.
Yamana increased its dividend by 10% on February 22, 2012, making the company’s dividend yield one of highest in the industry. The firm recently declared a quarterly dividend of $0.055 per share, payable April 13, 2012 to shareholders on record at the close of business on March 30, 2012.
Yamana controls a total of 22.1 million ounces of gold reserves across 13 of the company’s projects, plus an additional 23.5 million ounces of gold resources in all three NI 43-101 categories.
The Point is…
Despite a record in mine output and prices last year, the demand for gold is seemingly unwavering, emphasized by large central bank purchases last year. And I believe, with the expected surge in production costs in 2012, gold stocks with increasing production may greatly outperform those with flat or declining production.
Luke BurgessThe Three Best Gold Stocks for 2012,