One of the best ways to invest in gold is through mining companies. As gold prices increase, mining companies tend to provide leveraged returns.
Are all gold mining companies the same? You see, when gold prices rise, many mining companies follow the same direction. But the gains for some companies may not be as lucrative as others.
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To get the biggest bang for their bucks, investors need to pay attention to the three factors below. These three factors essentially, as I see it, could be the biggest contributors to the return that mining companies’ stock generates over gold prices.
Low Production Price Compare to Gold Prices
When looking for mining companies, production costs are very critical. For example, if gold prices are trading at $1,200 and a mining company produces an ounce of gold for $1,300, the company’s stock price must be questioned.
The idea behind this is very simple; for every one ounce of gold that the company extracts from the ground, with a market price of $1,200 per ounce and production price of $1,300 per ounce, the company loses $100.00 on each ounce it produces.
Companies with low production costs could profit big time when gold prices rise. But they also remain relatively stable when precious metal prices are suppressed.
For instance, look at Barrick Gold Corporation (NYSE:ABX). The company produced an ounce of gold at all-in sustaining costs of $704.00. This is one of the lowest gold production prices in the gold mining industry. (Source: “Barrick Reports Third Quarter 2016 Results,” Barrick Gold Corporation, October 26, 2016.)
Cash On Hand + Low Debt = Longevity
What happens when gold prices are low and expected to remain subdued for the next little while?
For gold mining companies, having cash on hand and low debt really helps in case the gold market turns. If a company has too much debt and no cash, it could run into troubles very quickly.
At the very core, a solid cash position and low debt gives mining companies higher odds of surviving during a downturn.
Consider Newmont Mining Corp (NYSE:NEM), for example. Its current assets alone were $7.11 billion at the end of the third quarter of 2016. Its long-term debt was just $4.55 billion. (Source: “Newmont Announces Third Quarter Operating and Financial Results,” Newmont Mining Corporation, October 26, 2016.)
Location of Mining Property
If a company has a mine in a country with long history of frequent wars, unstable politics, and corruption, chances are that the company will be considered very risky. In an instance, its outlook could change, and it may have nothing to with gold prices, its operations, or the grades of its assets in the ground.
A better move for investors would be to look for companies in mining-friendly countries, with a stable political environment. Even better would be gold mining companies with properties spread out in several safe geopolitical regions.
One example of this would be Goldcorp Inc. (NYSE:GG). This mining company has properties in U.S., Canada, Mexico, Argentina, and several other mining jurisdictions. (Source: “Mines & Projects,” Goldcorp Inc., last accessed December 16, 2016.)
Please note: the companies mentioned above are not recommendations to buy. They are just examples of what kind of opportunities investors could seek.
