The world of gold is quite lively these days. Sudden mine closures and falling gold prices are causing havoc in the market. Gold is a safe-haven, a place of security that people look to in times of political and financial upheaval. Until another disaster strikes, gold’s prospects look rather dim.
Gold Price in US Dollars data by YCharts
Why is the price of gold falling?
The above chart shows the VIX; a measure of volatility and risk. When the VIX is high there is a large amount of instability in the market. In the past year the VIX has consistently stayed below 26 and risk apatite has increased, decreasing the demand for safe havens like gold.
A recent report (pdf downloads on click) by the World Gold Council shows how investor and central bank purchases of gold have grown from a net negative in 2003 to a net positive. This means that fickle investor risk preferences are driving more volatility into gold prices.
What does this mean for the miners?
In 2012 the all-in sustaining cash cost was $945 per ounce. Other miners have lower cost operations, but at least Barrick Gold Corporation (USA) (NYSE:ABX) is still profitable. Its costs are still a couple hundred dollars away from the August, 2013 futures price around $1400.
This company is a very speculative investment and it is not clear when it will stabilize. It has a major debt load with a total debt to equity ratio of 0.64. It may be forced to sell off assets if gold prices do not improve. Even though it is trading at a discount with a price to book ratio of 0.81, this company is too risky for comfort.
In many ways Yamana Gold Inc. (USA) (NYSE:AUY) is in a better situation than Barrick. It has almost no debt with a total debt to equity ratio of just 0.10. Chile is a very well-run nation and 47% of Yamana’s 2012 production came from the Andean country. Chile’s decision to temporarily stop Barrick’s production is really a positive. It shows that country has grown and is able to solve grievances through the legal system. When a nation is unable to work out grievances through established legal means, then tensions can grow until nationalizations and coup d’états occur.
On the negative side, 16% of Yamana Gold Inc. (USA) (NYSE:AUY)’s 2012 production came from Argentina. This country recently nationalized a number of oil and gas assets and it could do the same in the mining sector. As Yamana Gold Inc. (USA) (NYSE:AUY)’s mines in the stable nation of Brazil come online, the firm’s level of geopolitical risk will gradually decrease. With an expected 2013 all-in sustaining cash cost to come in below $800 per gold equivalent ounce, Yamana Gold Inc. (USA) (NYSE:AUY)’s profits are more secure than Barrick Gold Corporation (USA) (NYSE:ABX)’s.
The copper market is not expected to do much better than gold over the short term. In 2013 a production surplus of 460 thousand tonnes is expected. On the positive side, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)’s Indonesian ore grades are expected to increase in 2013.
The company has little debt with its total debt to equity ratio of just 0.20. Its diverse operations and interests outside of the gold market help it to maintain profits and earnings. With a profit margin of 22.1% and return on investments of 18.9%, the company is more profitable than Barrick Gold Corporation (USA) (NYSE:ABX) or Yamana Gold Inc. (USA) (NYSE:AUY).
Conclusion
The price of gold is falling and highly indebted companies like Barrick Gold Corporation (USA) (NYSE:ABX) may get stuck between a rock and a hard place. When Europe’s debt crisis returns to the front page, Yamana Gold Inc. (USA) (NYSE:AUY) will be a good gold miner to consider with its low debt and relatively low all-in sustaining cash costs. Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) diverse operations provide more stability and security. Overall, it is the best option for risk-averse investors who don’t want to try and guess tomorrow’s gold price.
The article Time to Buy That Falling Golden Knife? originally appeared on Fool.com is written by Joshua Bondy.
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