There are winners and losers in every gold rush; for every miner that turned up gold in California in the 19th century, hundreds got absolutely nothing. In 2013, the value of gold keeps climbing due to increased demand from emerging markets.
According to the World Gold Council, global demand for gold was 4,361.8 tons last year, whereas mining companies produced around 2,817 tons in the same period. Demand for gold was mainly driven by East Asia, Middle East Asia, and the Indian sub-continent, which accounted for 66% of the growth in demand last year. Gold mining companies supplied 688 tons of gold in the first quarter of 2013, up by 4%, year-over-year.
Yet, as the old saying goes, history doesn’t repeat itself, but it does rhyme. Mining companies will try to increase their gold supplies to meet demand, but just as in 1849, there will be those who are positioned to take advantage of the rush, and those who miss out. Here are the three gold mining companies that lead in terms of market cap, and an analysis of which one is going to strike it rich, and which ones are going to come away with an empty pan.
Incremental production
In June 2013, the government of Suriname and Newmont Mining Corp (NYSE:NEM) finalized a deal to develop the Merian gold project. This agreement will be valid for 25 years, and the Suriname government will get 6% royalty on gold produced. Production from this region will start in late 2015, and estimated initial production will be around 400,000 ounces per year.
This will offset delays in Newmont Mining Corp (NYSE:NEM)’s Conga project in Peru, which was halted due to opposition from local communities. The Conga project has gold reserves of 6.1 million ounces and was expected to start by the end of 2014; it was supposed to contribute around 630,000 ounces of gold per year after that.
Newmont Mining Corp (NYSE:NEM) also has strong reserves of 36.9 million ounces of gold in North American mines. Out of these total reserves, the Carlin mine contributes 7.25 million ounces of gold, the Phoenix mine has 7.25 million ounces of gold reserves, and there are 3.8 million ounces of gold reserves in Twin Creeks, Nevada. Because of Newmont Mining Corp (NYSE:NEM)’s strong reserves, its shipment of gold from North American mines is expected to increase from 1.93 million ounces last year to around 2.03 million ounces in the current year. This can’t help but increase the company’s revenue.
Project delay halts growth
However, the company is betting that it will pay off in the long run. The Pascua Lama mine has gold reserves of around 17.9 million ounces and silver reserves of around 676 million ounces, and the life of the mine is 25 years. Due to its rich resources, Barrick Gold Corporation (USA) (NYSE:ABX) expects that production here will be low cost.
Production was supposed to start at Pascua Lama in 2014. However, the Chilean government stopped development of the project, citing major environmental concerns. Barrick Gold Corporation (USA) (NYSE:ABX) was asked to construct canals and drainage systems to divert water passages there. Construction will wrap up around 2015, and therefore this project is not estimated to start before 2016. When it is up and running, however, it is expected to produce around 0.85 million ounces of gold per year and 35 million ounces of silver annually.
Barrick Gold Corporation (USA) (NYSE:ABX)’s North American mines contributed around 3.5 million ounces of gold last year. The company operates 10 mines in North America, 7 of which are in Nevada.
The company realized a price of around $1670 per ounce of gold from North American mines last year, which decrease to $1400 per ounce this year because of recent volatility in the price of gold. Barrick Gold Corporation (USA) (NYSE:ABX)’s total revenue is expected to decrease from $15 billion in the last year to around $14 billion this year, and its earning margin is also expected to decrease, from 64.3% last year to around 60.3% this year.
Headwind in existing mines
In the first quarter of 2013, Goldcorp Inc. (USA) (NYSE:GG) reported an earning decline of 35% year-over-year. The dip in profit was mainly driven by increasing production costs and a lower price for gold. However, the company’s production of gold increased to 614,600 ounces in the first quarter, up by 15% year-over-year.
Goldcorp Inc. (USA) (NYSE:GG) started its operations in Pueblo Viejo last year, and produced 41,200 ounces of gold. Gold production in this region will increase by 828%, to around 382,000 ounces in the current fiscal year. The company produced 64,700 ounces of gold from Pueblo Viejo in the first quarter of 2013.
However, the increase in production from the new mine at Pueblo Viejo will be offset by lower production in Goldcorp Inc. (USA) (NYSE:GG)’s existing mines. Production of gold is estimated to remain low in Red Lake, Canada due to a delay in the project and a decrease in the quality of gold. It is expected that average production in this region will remain at 492,000 ounces this year, down by 4% year-over-year.
Additionally, in Peñasquito, Mexico, production is expected to lower this year by 8%, year-over-year, to around 380,000 ounces, as mining in the lower grade portion of this pit will affect the production. Gold production in the Wharf region was 68,100 ounces last year, which is expected to decline by 16% year-over-year. Lower gold production from existing gold mines will limit Goldcorp Inc. (USA) (NYSE:GG)’s growth in this fiscal year.
Conclusion
Newmont Mining Corp (NYSE:NEM)’s new project will offset the production delay in Conga, and an increase in shipments of gold from North America will help the company boost its growth. This stock is a buy.
Barrick Gold Corporation (USA) (NYSE:ABX)’s project delays will halt growth, and at the same time its project in Chile is getting ever more expensive. And while production increases from Pueblo Viejo are a positive sign for Goldcorp Inc. (USA) (NYSE:GG), its declining production from existing mines will halt the growth of the company. These stocks are a hold.
The article Not All Gold Miners Are Glittering originally appeared on Fool.com and is written by Madhu Dube.
Madhukar Dubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Madhu is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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