Despite Falling Price of Gold, Mines Still Profitable - Dundee Securities Analyst

The recent decline in the price of oil has investors, analysts and companies themselves looking at what level of profitability will remain intact. The same goes for gold, which continues to trade well off its peak of over $1000 per ounce in March.

After reviewing the second quarter costs of 152 gold mining operations around the world, Dundee Securities is confident that gold producers are still profitable at current prices. The price of gold may have fallen for most of 2008, but the decline has been far more dramatic in base metals.

Dundee analyst Paul Burchell said in a research note:

We do expect revenues and earnings to decline given current bullion prices. However, we do not expect to see a significant number of mine closures caused by low gold prices.

Larger producers typically inhabit the lower half of the cost curve, he noted. A survey of 35 companies showed that the 17 lowest cost names produced an average of more than 420,000 ounces of gold in the second quarter. In comparison, the 17 highest cost producers turned out slightly more than 125,000 ounces.

As a result, Dundee recommends investors focus on larger cap, pure gold producers.

But while gold production does not appear to be in jeopardy, future growth profiles may, the firm warned. Large capital development programs could be delayed and acquisitions may not happen as many are anticipating since producers may do whatever they can to protect earnings and hoard cash given the tight credit market.

Lower fuel price in the third quarter should help reduce production costs. So too should weaker local currencies for non-U.S. operations. However, those projects that are exposed to or have benefited from base metal and silver by-product credits are likely to see costs rise, Mr. Burchell noted.

Comments

[Hal.P.:]

This is good news. I been seeing that a number of mining companies are well positioned in cash and now with the lower fuel costs they appear well leveraged to make it through what to many is going to be a difficult economic season.

2008 Nov 05 11:49 AM