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The Main Reason Why Gold Mining Stocks are Underperforming Gold

As investors are well aware, costs in the mining industry have been rising over the last several years. Here at Resource Stock Guide, we track production costs for several dozen small and mid-tier gold, silver and uranium producers with around 100 operating mines. Quarterly, we analyze cost and margin trends.

Silver and uranium stocks have been good performers over the last 12 months. RSG Silver Benchmark is up over 20%, while Uranium Benchmark is up over 100%; gold stocks, however, have been definite laggards.

We poured through Q1 financials of a large number of gold producers and selected the most representative to summarize our findings.

The list includes 8 companies encompassing 23 mines spread over 12 countries in diverse geographical regions. In our analysis, we used total cash costs per ounce, a common metric used by companies to manage and evaluate operating performance at each mine and widely reported in the gold/silver mining industry as a benchmark for performance measurement.

      Profit Profit  
Company Name Mine Country Margin Q4* Margin Q1* Change
Iamgold (IAG)
  Sadiola Mali 52.24% 37.08% -15.16%
  Mupane Botswana 12.30% 0.00% -12.30%
  Yatella Mali 61.86% 72.31% 10.45%
  Rosebel Suriname 32.19% 22.31% -9.88%
  Doyon Canada 26.48% 21.69% -4.79%
  Sleeping Giant Canada 27.30% 49.23% 21.93%
  Tarkwa Ghana 44.58% 42.31% -2.27%
  Damang Ghana 25.18% 28.31% 3.13%
Yamana (AUY)
  Sao Francisco Brazil 53.71% 49.54% -4.17%
  Jacobina Brazil 45.88% 27.69% -18.19%
  Fazenda Brazileiro Brazil 41.81% 49.23% 7.43%
  Fazenda Nova Brazil 50.28% 15.23% -35.05%
  San Andres Honduras 43.11% 44.77% 1.66%
Gammon Lake (GRS)
  Ocampo Mexico 52.24% 33.23% -19.01%
  El Cubo Mexico 48.16% 21.85% -26.32%
El Dorado (EGO)
  Kisladag Turkey 68.54% 70.15% 1.61%
Centerra (CG.TO)          
  Kumptor Kyrgyz Rep. -28.61% 1.69% 30.31%
  Boroo Mongolia 63.32% 71.69% 8.37%
Golden Star (GSS)
  Wassa Ghana 24.36% 24.92% 0.56%
Meridian Gold (MDG)
  El Penon Chile 100.33% 110.46% 10.14%
  Minera Florida Chile 94.95% 86.00% -8.95%
Randgold (GOLD) Loulo Mali 46.86% 50.77% 3.91%
  Morila Mali 46.70% 50.46% 3.77%
Average 44.95% 42.65% -2.30%
* Profit margin based Non-GAAP total cash cost measure


As seen in the table above, average profit margins based on total cash costs fell from 44.95% in Q4/06 to 42.65% in Q1/07. This is at the same time when gold rose from an average price of $613.5/oz in Q4/06 to an average $650/oz in Q1/07 or 5.96% gain.

Cash costs were negatively impacted by the industry-wide escalations in labor, spare parts and energy costs, due to the processing of lower grade ores and in some cases lower mine production. So, in fact total cash costs per ounce are rising at a faster rate than the gold price. As a result, most gold producers have become less profitable over the past 2 quarters.

This appears to be one of the major reasons why gold stocks have been underperforming the yellow metal.

As paradoxical as it may sound, the best thing that can happen to gold producers is an economic slowdown especially if one remembers the anti-cyclical nature of gold.

As far as silver producers are concerned, their stock prices have been rising despite decreasing profit margins. But the situation there is quite different in terms of investor expectations, which is the subject of our next article.


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