Commodities & Metals

It Stinks To Be A Gold Miner (GG, GDX, ABX, NEM, AU, GLD)

It is often a wonder why some investors would want to own a gold mining stock if they want to invest in the upside of gold.  The rewards can be immense, but taking individual company risk can often be entirely uncorrelated to the actual price of gold.  Look no further than GOLDCORP INC. (NYSE: GG).  The Canada-based gold player lowered its production guidance and raised its expectation for production costs.  To make matters more complicated, this could be more widespread than just one gold outfit because mining interruptions happen to all companies at some point.

GOLDCORP disclosed that its gold production was up 10% sequentially to 578,600 ounces. The preliminary calculation of operating costs on a by-product basis are expected to be about $370 per ounce. More importantly, on a co-product basis the expected cash costs were put at about $620 per ounce for the second quarter and $635 per ounce for the first half of 2012.  Safety measures and production delays at its Red Lake gold production are partly to blame and production at that location is now put at 460,000 to 510,000 ounces in 2012 compared to previous guidance of 650,000 ounces.  Due to water supply issues at its Penaquito location, gold production is now expected to be 370,000 to 390,000 ounces in 2012 compared to previous guidance of 425,000 ounces.

It is very important to realize that GOLDCORP is no second tier gold miner and producer.  Even after a 9% drop to $33.44 it has a market cap of some $27 billion. The Market Vectors Gold Miners ETF (NYSEMKT: GDX) is down “only” by 1.9% at $42.07 after about an hour of trading.  Here are a few other outfits we are watching: Barrick Gold Corporation (NYSE: ABX) is down 2.8% at $34.64 with a $35 billion market cap; Newmont Mining Corporation (NYSE: NEM) is down 1.5% at $45.70 with a $23 billion market cap. Not all gold miners are suffering as a result with AngloGold Ashanti Ltd. (NYSE: AU) is up $0.05 at $32.59.

Gold is now up on the day, perhaps based upon lower supplies expected by GOLDCORP, and the SPDR Gold Shares (NYSEMKT: GLD) is up 0.4% at $152.80.

JON C. OGG

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