Seeking Alpha
, Portfolio123 (1,577 clicks)
Long only, value, research analyst, dividend investing
Profile| Send Message|
( followers)  

After the dramatic decline in the price of gold by 27.9% from its all time high, $1,923.7 an ounce, on September 06, 2011, to $1,386.6 an ounce, on May 24, 2013, one might ask if an investment opportunity has arisen. In order to find out if now it is the right time to invest in gold, the fundamental parameters of this precious metal - demand, supply and reserves - require analysis. In my previous article, I summarized the global demand for gold. In this article, I will discuss the tendency of gold supply, gold mining costs and gold reserves.

Mine Production

According to World Gold Council, the total world gold mine production rose from 2,555 tonnes (82.2 million ounces) in 2003 to 2,856.8 tonnes (91.9 million ounces) in 2012 while the Compound Annual Growth Rate (OTCPK:CAGR) was at 1.25%. At this point, the growth rate was much less than the growth rate of world gold demand which was at 5.94% over the same period.

(click to enlarge)

(click to enlarge)

Data: World Gold Council

Production of Gold Recycled

The total world gold recycled production rose from 980 tonnes (31.5 million ounces) in 2003 to 1,590.7 tonnes (51.1 million ounces) in 2012 while the Compound Annual Growth Rate (OTCPK:CAGR) was at 5.53%. Gold recycled accounted for 27.7% of the world gold supply in 2003 and for 35.8% of supply in 2012. The increase in the price of gold has made its recovery more profitable.

(click to enlarge)

(click to enlarge)

Data: World Gold Council

World Proven Gold Reserves

According to the U.S. Geological Survey's 2013 report, the aggregate unmined known reserves of the entire world's gold mining companies are equal to 52,000 tonnes (1,672 million ounces). Considering 2012 mine production of 2,856.8 tonnes, it means that there is any underground gold left for only another 18 years. However, if that was the case, gold prices should have soared into the sky.

The best estimate at the end of 2012 was that around 165,000 tonnes (5,305 million ounces) have been mined in all human history, and more than half of humanity's gold has been extracted in the past 50 years.

It is true that the world's richest deposits are being depleted in an accelerated rhythm, new discoveries are relatively rare, it is difficult to find gold in commercial quantities, and it also takes time, typically 5 years, and plenty of money to bring mines into production. Nevertheless, while examining USGS reports since 1995, we can see, as presented in the chart below, that although each year about 2,500 tons of gold are being mined, gold reserves are left almost unchanged. It means that new discoveries and the development of old mines take place at the same pace as the total mine production. Hence, it seems like 20 years from now gold reserves will still be the same.

(click to enlarge)

Source: USGS

Cost of Mining Gold

The chart below that was taken from Barrick Gold (NYSE:ABX), the world largest gold producer, May 14, 2013, presentation, emphasizes that the average gold mining grade has dropped 22% between 2001 and 2011 to about 1.5 grams of gold per tonne of ore. This means that it is necessary to process 28% more ore to get the same amount of gold.

(click to enlarge)

The chart below that was taken from the same presentation shows that the cost of mining gold has more than tripled between 2004 and 2012.

(click to enlarge)

The chart below was taken from Barrick's 2012 fourth quarter results presentation, which shows in detail the company's cost of producing gold in 2012, which totaled $945 an ounce and with total cash costs of $584 an ounce.

(click to enlarge)

Main Gold Miners

The table below presents the market cap, the trailing twelve months gross margin and the five year average gross margin for the ten largest, by market cap, gold miners traded in the U.S. stock markets.

Name

Ticker

Last Price

Market Cap $million

Gross Margin TTM

Gross Margin 5 Year Average

Goldcorp Inc.

(NYSE:GG)

26.83

21,786

55.28%

57.94%

Barrick Gold Corp

ABX

19.16

19,182

19.64%

47.00%

Newmont Mining Corp

(NYSE:NEM)

31.97

15,896

50.63%

51.13%

Yamana Gold Inc

(NYSE:AUY)

10.82

8,141

62.34%

63.11%

Randgold Resources

(NASDAQ:GOLD)

73.98

6,821

53.75%

51.21%

Kinross Gold Corp

(NYSE:KGC)

5.80

6,622

54.80%

55.94%

Anglogold Ltd

(NYSE:AU)

16.34

6,272

44.88%

43.82%

Franco-Nevada Corp

(NYSE:FNV)

41.07

6,027

68.45%

70.50%

Eldorado Gold Corp

(NYSE:EGO)

7.30

5,210

61.53%

65.31%

Agnico Eagle Mines

(NYSE:AEM)

28.82

4,968

51.33%

32.75%

Summary

After analyzing the late gold supply and demand trends, we can see that the growth rate of world gold demand which was at 5.94% is much higher than the growth rate of world gold mine production which was at 1.25%. In addition, the average gold mining grade has dropped 22% between 2001 and 2011, and the cost of mining gold has more than tripled between 2004 and 2012. All these factors, in my opinion, support a higher price of gold, and I recommend investing in gold now, with a long-term perspective.

Source: Is It Time To Buy Gold? Part 2