Gold: Making Money From The Ukraine Crisis

Includes: AU, AUY, GLD, KGC
by: Equity Flux


Gold prices are on the rise due to a combination of reasons.

The Ukraine crisis is bad news for miners involved in Russia.

If the crisis worsens, the upward pressure on gold prices can be good news for miners not mining in russia and bad news for players like Kinross.

Gold (NYSEARCA:GLD) prices have been appreciating in the year to date firstly because of upward pressure caused by the Chinese New year demand and now due to the equity market and the unrest in Ukraine. Russia's advances in Crimea and its tensions with the EU and US have boosted the yellow metal due to the consideration of safe-haven. The Ruble might experience a decline if this situation continues as the investors will see this region as a highly volatile emerging market. The Ruble has already declined 2.9% against the Dollar in Feb 2014 which means that investors will seize the opportunity of investing in gold before it starts climbing. But considering the way in which the current situation is developing, it is hard to predict the market's short term movements.

"Geopolitical risk out of Ukraine is giving gold a safe-haven bid," Victor Thianpiriya, an analyst at Australia & New Zealand Banking Group, said from Singapore. "It remains to be seen if it will be sustained. There's that key resistance level of $1,345 to get through. Fundamentally, there's not going to be much support from Asian physical buyers."

Moreover, the Ukraine crisis is also hitting the equity market and pushing investors into the physical commodity market. MSCI Asia Pacific Index fell by 1% in Hong Kong while futures on S&P 500 Index declined by 1.1%. The uncertainty created by the fed tapering and doubts over U.S. economic recovery have added to investors moving towards gold. Furthermore, the high inflation rate of 25% in Argentina according to economists and 10.72% in Turkey in the Domestic Producer Price Index in Jan 2014 makes the yellow metal very attractive to many investors, creating an upward pressure on its price. In China the demand for gold may increase further as the pace of the country's economic growth is slowing down which might lead to an increase in inflation and as gold is the best hedging of inflation, Asian investors are expected to increase its purchase.

We believe that the 3 gold miners that can be affected from the current situation are Yamana Gold (NYSE:AUY), Kinross Gold (NYSE:KGC) and AngloGold Ashanti (NYSE:AU).

Source: Y Charts

Location of Mines

Yamana Gold has a 100% ownership of the Gualcamayo mine and a 12.5% stake in the Alumbrera mine located in Argentina. During 2013 the mines contributed 10% and 3% respectively to the company's total production with cash costs of $772/geo from Gualcamayo and $364/geo from Alumbrera. AngloGold Ashanti only has one mine in Argentina, at Cerro Vanguardia, with a 92.5% stake. The company's sole mine in Argentina reported an attributable gold production of 236,000 ounces during 2013 with a total cash cost of $622 per ounce. If we look at Argentina's economic conditions we can see that the Argentinean peso is devaluing due to high inflation rates, giving an edge to Yamana and Ashanti as the companies can benefit from low costs of production due to the US dollar's strength against the Peso. The graph below shows how much the peso has devalued against the US dollar (year to date), improving the market conditions for both gold miners in Argentina. If the inflation rate rises (which is the expected situation) the peso will devalue further, decreasing the cash cost of production from these mines and the 12% increased production from Yamana's Gualcamayo mine during 2014 will be at a lower production cost.

Source: XE Currency

Gabriel Torres, an analyst at Moody's Investors Services, stated in a research note:

"Although the devaluation may temporarily stem the pressure on foreign currency reserves, it remains unclear what policies the government plant to pursue to address the underlying causes of capital flight, curb inflation and restore investor confidence. Hence, Argentina's credit quality will likely continue to face negative pressure."

Furthermore, Moody's has also forecasted that the Argentinean peso will devalue by a further 50% over the year, pushing inflation rates close to 30% during 2014.

The devaluation of the currency may appear to be an attractive factor but there are drawbacks of operating in Argentina. In 2012, the Santa Cruz congress passed a law charging a 1% tax on the value of mineral reserves annually (which is still not enacted). If this law is enacted, the gold miners will have the option of either challenging it in a court or paying the tax, which means that costs might increase and counter the effect of the devalued peso. However, it is too early to say if the government will even consider going ahead with the tax policy as this contradicts an article in Argentina's constitution that grants 30 years of fiscal stability to mining projects. But this action by the Santa Cruz congress shows that the government can take any step to control its budget deficit and this might damage the companies operating in the country. This development is of concern to Anglo Ashanti as its mine is in Santa Cruz.

Argentina has been given a risk rating of 7 out of 7 by OECD, which is the highest risk involved in investing in a country. This high rating may have been due to economic instability, high inflation and the government's fabrication of inflation rates to the IMF which raised questions about the country's credibility. This indicates that the investor should be cautious about investing in both Yamana and Anglo Ashanti because with the upsides (devaluing currency) there is also a distinct downside of operating in Argentina.

Yamana's Gualcamayo Depletion Time

We have only considered proven reserves for our calculation. However, if we take into account both proven and probable reserves, we can see that the company has 1,375,000 ounces of gold reserves at the end of 2013. This means that the production cost will not be showing an increasing trend as higher reserves indicate that the waste to mineral ratio is expected to be compared to mines having low level of reserves. We can see this from the 72.5% gold recovery rate of Gualcamayo mine during 2013, which is 4% lower than 2012 but still a very good recovery rate. Furthermore, Alumbrera mine is near the end of its estimated life which means that the production cost per ounce from this mine will start increasing as the waste to mineral ore ratio goes up.


Remaining GEO Reserve*

GEO Production^

Depletion Time (Quarters)





*remaining GEO Reserve = (Dec 2012 Reserve) - (2013 total production)

^GEO production = average production per quarter

Kinross Gold

Kinross has two mines currently operational in Russia. Kupol mine (the company's flagship mine) and the Dvoinoye mine, which has recently started its commercial production in Oct 2013. Kupol produced 550,188 gold equivalent ounces during 2013 making it the highest contributor to total production while Dvoinoye is expected to produce between 235,000 and 300,000 gold equivalent ounces during its first three years of production which will make this region the highest producing region for Kinross. From the chart below, we can see that 21% of the company's total production was from Kupol, which will be further increased with the addition of the Dvoinoye mine during 2014.

Furthermore, Kupol has the lowest production cost of sales at $507 per ounce while Dvoinoye is forecasted to have cost of sales of around $545 to $600 per ounce of gold equivalent.

Source: Kinross

The reason for mentioning the company's mine locations and production was the fact the Ukraine issue is affecting Russia's ties with many European countries and the US. Furthermore, Kinross is a Canadian company, which means that if tensions worsen between Russia and the US, Kinross might have to close its Russian operations, which will greatly affect its financial performance. The company spent an estimated $370 million on the Dvoinoye mine while $175 million was spent on upgrading the Kupol mine during the last two years. Even though this expenditure has resulted in an increased production, it will prove to be of no use if the company is forced to close operations as the production per quarter will fall and decrease the company's total revenue. With the closure of Russian mines, the total cost of sales will increase to around $805 per ounce from last quarter's $743 per ounce according to our estimates.


Amounts in ($ Billions)

Yamana Gold

AngloGold Ashanti

Market Capital



Long term Debt



Cash and Cash equivalents



Enterprise Value



We have not included Kinross Gold because if it forecloses its Russian mines, the company's share price will take a dive and its market cap will be reduced immensely. According to our estimates, the enterprise value of Yamana is $8.53 billion while that of Anglo Ashanti is $10 billion. From this we can calculate both companies' EV per share to be close to $11.32 and $24.74 per share, respectively. Comparing this with the current share price of around $10.14 and $17.52 per share we can see that AngloGold has more potential of growth than Yamana.

Furthermore, both companies are equally risky as they are operating in Argentina but this also presents them with the opportunity to exploit the deteriorating peso with reduced mining costs. We believe that if the Ukraine situation persists, the prices of gold will go up and increase profit margins for Yamana and AngloGold Ashanti whereas Kinross will suffer from decreased production levels and increased cost of sales if it is forced to close its operations in Russia until political stability is restored in the region.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Equity Flux is a team of analysts. This article was written by our Basic Material and Financial analyst. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.