These 3 Gold Producers Have The Lowest AISC - And Huge Upside Potential

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Includes: CELTF, GOLD, MUX, NGD
by: Leo Semmelmann

Summary

Polyus Gold, New Gold and McEwen Mining are the gold producers with the lowest All-In-Sustaining-Cost (AISC).

Centamin with its nice dividend payments, strong cash flows and 694$ AISC per ounce may be an interesting investment opportunity.

New Gold is traded with a discount after a sell-off, caused by unexpected additional costs at the Rainy River mine project.

How could you figure out, which gold producer is a good investment? Well, there are several factors which should be regarded:

  • The gold producer should earn money
  • The gold producer should also earn money in the future
  • The gold producer’s assets shouldn’t be exposed to political risk

I wouldn’t say that the gold business is easy, but it is definitively easier to observe than many other sectors. For each of the questions asked, there is a way to get an answer. Through comparing gold prices and all-in-sustaining-cost, it is possible to find out if a gold producer earns money – and how high the respective margin is. Comparing yearly production with gold reserves tells you about the expected mine life, and thereby if the company also earns money in the future. While checking the political risks, the company’s country of origin as well as the country of the company’s assets (mines) have to be regarded.

Focusing on AISC, choosing the stocks with the lowest AISC

In this article, I will focus on the first point: Which mines have the lowest all-in-sustaining-costs (AISC) and thereby the highest margins? Right now might be a good time to invest in gold stocks, so it is beneficial to know which gold stocks are worth looking at. In times of political uncertainty and volatile stock markets gold stocks are always a good hedge!

I took the gold miners dataset and ranked the list from lowest to highest AISC. The first three results were Polyus Gold, McEwen Mining and New Gold. I really appreciate Polyus Gold with their stunningly low AISC of 519$ per ounce and huge cash flows – but as a Russian company I will exclude them from the list, in respect to my third factor: “The gold producer’s assets shouldn’t be exposed to political risk”. The former rank four, Centamin., is our new rank three. Congratulations!

Now I will look in detail at our winners.

3. Centamin, UK, $694 AISC p. oz.

This is the dream of every gold miner: increasing production, decreasing costs. That is exactly what Centamin (OTCPK:CELTF) managed throughout the last years. AISC dropped from 885$ per ounce to 694$ per ounce, production reached 551k ounces per year and revenue climed to 687 million USD. Net profit were summing up to 267 million USD, resulting in 18.6 cents EPS. Drawbacks may be the high share price and the country of the company’s main asset, Egypt, which is located in a region of geopolitical tensions.

2. New Gold, Canada, 692$ AISC p. oz.

The Canadian mid-tier gold producer New Gold (NGD) operates four mines in Mexico, Canada, Australia and the US. Amongst gold, the mining company produces silver and copper. In 2016, New Gold mined 382k ounces, resulting in 461 million USD (GOLD) revenue. The company’s total revenue was 683 million USD, net earnings were around 3 million USD. Although the yearly 2016 results were good, the company faced challenges with a new project, the Rainy River mine in Canada. The first production in 2017 had to be postponed for three months – and capital costs for the project raised by 195 million USD, which led to a sell-off. In June, New Gold announced to be in line with the January plan. In the long term, Rainy River will result in higher yearly production and revenues.

1. McEwen Mining, Canada, 610$ AISC p. oz.

Canadian McEwen Mining (MUX) with record-low all-in-sustaining costs of 610$ per ounce operates projects in Argentina, Chile, Mexico and the US. One curiosity about the company is that CEO Rob McEwen (who is also the founder of Goldcorp) only takes a symbolic salary of 1$ per year. In turn, he owns 25% of the company. Yearly gold production in 2016 was at 95k ounces (on a 100% basis), silver production was at 6.7 million ounces. I had to mention the 100% basis, because the company’s San Jose mine in Argentina is 51% owned by Hochschild mining. Altogether, McEwen Mining generated 60.3 million USD revenues and 21 million USD net income. A problem of McEwen may be the high dependence on the stake in the San Jose mine. The first own project, the Gold Bar mine in Nevada, will only start with initial stage construction in the end of 2017.

Summing up and closing words

What does this article say to you? McEwen Mining is the best gold producer and any company which is not appearing in this list is a bad investment? Of course not! Low AISC is nice, but doesn’t bring any advantage when the specific stock is overvalued or the company’s future prospects are bad. See this article as: “Those stocks may be worth a second look”! In times of lower gold prices, all three companies stand a good chance to stay profitable. In case of further rising gold prices, or even times of crisis, all the companies have huge upside potential.

In my opinion, Centamin is the most attractive stock through its nice cash flows, low costs and decent dividend payments. Also if we compare the performance of the three stocks during the last five years, Centamin performed best. New Gold is traded at a fair discount after the Rainy River debacle, but also has to be enjoyed with care. McEwen Mining, even though it has the lowest AISC, is also the most dangerous stock. You will pay a management premium (stockholders are convinced of Rob McEwen), but future prospects are unclear

Disclosure: I/we 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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.