Earnings season for gold and silver miners will begin in the next couple of weeks. As miners begin to report their earnings, there are a number of things that both mining and ETF investors should pay close attention to which we will go over briefly in this article.
Gold and Silver All-in Costs
Perhaps the most important thing for precious metals investors to pay attention to this earnings season is the costs of production that gold and silver miners will be reporting for Q4FY13 and for FY2013. We've been heavily covering this metric in our prior articles, and in our complete third quarter gold miner all-in costs analysis we cover a number of figures for the all-in costs that the industry has reported over the third quarter.
Investors need to pay close attention to the all-in figures reported by both the gold and silver miners because for many of them all-in costs are at or even above the current price for gold and silver. How are the miners going to deal with this situation? Are costs going to continue to come down as we saw in the third quarter?
Obviously, these numbers will be very important for mining investors because it will determine the profitability of the companies going forward and give investors an idea of the appropriate valuations at current and future gold and silver prices. But these numbers are also very important for serious investors who own physical gold, silver, and the gold and silver ETFs (SPDR Gold Shares (GLD), iShares Silver Trust (SLV), PHYS and PSLV), because they will give those investors an idea of the future of mine supply.
As we've stated a number of times before, mine supply is extremely important to the supply and demand picture of the gold industry and is especially more so now that gold and silver recycling has plummeted (we're not seeing many "cash for gold" advertisements for a reason). Add in the fact that the future supply of gold looks very weak, gold and silver ETF investors should be paying close attention to these cost numbers as they come out - the higher the all-in costs the more attractive gold and silver become as investments.
Where is Cost-Cutting Coming From?
Now, we expect costs to fall in the fourth quarter simply because mining companies cannot produce gold and silver and a loss and stay in business for very long. But the important thing for investors to note is where is the cost-cutting coming from? Is it structural cost-cutting or is it temporary cost-cutting?
Investors can monitor the cost-cutting by paying close attention to the income statements and comparing them on a sequential and year-over-year basis. If cost-cutting is coming from exploration expenses, then that suggests the cost-cutting efforts are of the temporary variety - miners need to explore to replenish production and cutting exploration is appeasing short-term investors at the expense of long-term production (and ultimately survival).
Investors should also pay close attention to the tonnage costs and grades of the ore processed. This will help them determine some more detail about cost-cutting efforts and if the miners are "high-grading" their production - which also has longer-term consequences for the supply picture.
Another thing for investors to look for this earnings season is management views toward mergers and acquisitions. This primary applies to the larger companies such as Barrick Gold (ABX), Newmont Mining (NEM), Goldcorp (GG) and Kinross Gold (KGC) since they will be the ones who would really be doing a lot of the acquiring. Investors should look to see if companies are considering acquisitions as a way to boost reserves, and if they have the finances to do so (cash and debt levels are critical).
Explorer and Developer Balance Sheets
Investors with positions in developers and explorers (companies with no cash flows) should be carefully monitoring the cash and debt levels on these companies' balance sheets. Company burn rates should be calculated to determine how long a company can survive without additional cash injections - companies with less than a year of cash on hand should probably be sold unless there are strong reasons to own them.
Mexican Tax Implications
Finally, for those investors that own shares in some of the miners with significant Mexican operations like First Majestic Silver (AG), Endeavour Silver (EXK), SilverCrest Mines (SVLC), Great Panther Silver (GPL), Fortuna Silver (FSM), Alamos Gold (AGI) and even Goldcorp, will want to pay close attention to the implications of the Mexican tax increase on earnings going forward.
How are companies going to react to this new law? We already know that Alamos Gold is transitioning a number of operations to contract mining to lessen hit of the tax, it is yet to be seen how other companies will deal with this tax.
Finally, how hard will it hit their earnings and their break-even production costs? The Mexican gold and silver producers have had some of the lowest costs in the industry, and now that those costs will rise - will they still stay on the lower end of the all-in cost figures? Or will they drop significantly in the rankings, to the point that producers will want to expand to other jurisdictions? A lot of questions have yet to be answered in the previous reports regarding this tax and we should see significant clarification in this season's earnings reports.
There are a number of things that will be very important for gold and silver mining and ETF investors to monitor in this upcoming earnings season. Perhaps it is the most important earnings season in quite some time as we continue to see how the miners will react to the biggest gold and silver drop in history. There is a lot for investors to examine ranging from the costs of production to the views of management on the acquisitions picture - this season should be very interesting!
Additional disclosure: Many of these holdings are smaller than our normal size - so investors shouldn't assume any of them are large positions (except for the ETFs)