In my previous post here, I recommended buying gold, and in another post here I compared the different ways to invest in gold: futures contract, ETFs and shares of gold mining companies. But what about buying shares of gold companies, which one would give a better return? Since the sell price of the product of these companies, gold, is practically the same, comparing the cash cost of gold production for each company should give us an idea about their prospects. Other fundamental parameters like the price to earnings, dividend yield and so on, should obviously be taken into account as well.
First let us compare the Total Cash Costs of producing gold for the 12 most important gold miners whose stocks trade on the US markets: New Gold (NGD), Yamana Gold (AUY), Barrick Gold (ABX), Agnico Eagle Mines (AEM), Goldcorp (GG), Newmont Mining (NEM), IAMGold (IAG), Randgold Resources (GOLD), Kinross Gold (KGC), Gold Fields (GFI), Golden Star Resources (GSS) and AuRico Gold (AUQ).
World Mine Cost Data Exchange shows the Gold Institute definition of Total Cash Costs as adopted by most North American gold producers in 1996. These are:
Total Cash Costs: Cash Operating Costs plus Royalties (not-profit based) and Production taxes.
Cash Operating Costs: Direct mining expense, smelting, refining and transportation costs. By-product credits.
The table below presents the gold production and the total cash costs of producing gold for the first six months of 2012 for the 12 gold miners. All the figures were extracted from the companies' 2012 second quarter reports.
Source: company reports; chart: Arie Goren
The table clearly shows that, among the biggest gold producers, Barrick Gold's total cash costs, $580 an ounce, is the lowest, 13.7% less than the second biggest producer Newmont Mining, and 32.6% less than the third biggest producer Gold Fields. The Intermediate gold producer, New Gold, had the lowest total cash costs, $507 an ounce; and AuRico Gold had total cash costs, $698 an ounce.
The table below presents the main fundamental parameters for the 12 gold mining companies.
The fundamental parameters of New Gold, which had the lowest total cash costs, are not that promising. Its forward P/E is high, 16.96, and its PEG ratio is extremely high, 9.09. NGD is also a relatively small gold producer, only 194,000 ounces for the first half of the year. The fundamental parameters of Yamana Gold, which had the second lowest total cash costs, are not so good either. Its forward P/E is high, 13.72, and its PEG ratio is also high, 3.27. AUY is also a relatively small gold producer, only 559,000 ounces for the first half of the year. Due to these factors, in my opinion, the stocks of these two companies cannot be considered the best among the gold mining companies.
Barrick Gold, which had the third lowest total cash costs, is the world's largest gold producer, accounting for about 10% of the global gold mining production. The actual P/E of the company is quite low, 10.45, and the forward P/E is even lower, 8.73, while its annual dividend yield is 1.87%. Although the earnings growth estimates for the next 5 years (per annum) are only 2.0%, I believe Barrick Gold is the best choice among the gold mining companies due to its low total cash costs, which is only $580 an ounce and due to its leading production capacity.