Every investor strives to be a contrarian; the individual who can see the wisdom and the folly of the crowd for what it is. The contrarian message usually gets watered down to the idea of simply doing the opposite of what everyone is doing. The gold market is one place where it is extremely dangerous to blindly follow a watered-down contrarian message. Just because gold prices and the stock prices of gold miners have crashed, they are not automatically poised for a rebound.
NEM Total Return Price data by YCharts
In the past year, the price of gold has fallen from $1,800 to $1,200 per ounce. In the long run, Newmont Mining Corp (NYSE:NEM) is close to being unprofitablewith an all-in sustaining cost of $1,100 to $1,200 per ounce. The company is a major gold and copper producer, and its African Akyem project should come online later this year. The miner’s main plan is to cut costs, but this is not a sustainable long-term strategy.
Barrick Gold Corporation (USA) (NYSE:ABX) is in a safer position with an all-in sustaining cost of $950 to $1,050 per ounce, but it has a number of other negative factors. It expected to take an impairment charge between $4.5 billion to $5.5 billion on its Pascua Lama project. A number of costly overruns and legal challenges in Chile have brought the mine’s development to a halt. Being the world’s biggest gold producer has its downsides, as Barrick Gold Corporation (USA) (NYSE:ABX) can only hunt the biggest beasts on the market. When one of its big projects fails, it has a serious impact.
Being the world’s largest gold miner with a falling gold price is not easy. The company’s production is expected to fall from 1.88 million ounces in 2012, to 1.80 million ounces in 2013. It is hard to argue that that it is time to take a contrarian position in Barrick Gold Corporation (USA) (NYSE:ABX). The company carries billions in debt with a total debt to equity ratio of 0.64 and a ROI of (2)%. The company is expected to post earnings per share (EPS) of $2.95 in 2014, but that doesn’t change the fact that its production is falling and the Pascua Lama’s start date keeps getting pushed back.
Yamana Gold Inc. (USA) (NYSE:AUY) is one of the safest gold miners. In Q1 2013, its all-in sustaining cost was $856 per ounce. This cost is significantly smaller than the all-in sustaining costs of Barrick Gold and Newmont Mining Corp (NYSE:NEM). Yamana Gold Inc. (USA) (NYSE:AUY) is a nimbler producer and easily reacts to market changes. It mainly produces gold, but its mines also have silver and copper supplies. To keep its production growing, it is continuing to develop its Pilar and Cerro Moro mines.
Financially, the company is healthy with a total debt to equity ratio of just 0.11. Its ROI of 4.3% and profit margin of 16.2% are lower than Newmont Mining Corp (NYSE:NEM), but in the long run, Yamana Gold Inc. (USA) (NYSE:AUY)’s low all-in sustaining costs should boost its profitability.
When will gold stop falling?
It is hard to tell when gold will stop falling, but the age old supply and demand equation will have an important part to play. Mines cannot be shut down in the blink of an eye, and miners are hesitant to recognize losses. For these reasons, it will probably be some time before supply falls enough to boost prices.
Conclusion
Being a contrarian and simply buying up all of the gold miners may sound attractive, but it is difficult to support such a strategy. Newmont Mining Corp (NYSE:NEM)’s high all-in sustaining costs overshadow its high ROI and profit margin. Barrick Gold Corporation (USA) (NYSE:ABX)’s profits will return, but its cost overruns in Chile and large size make the company a questionable long-term investment. Yamana Gold Inc. (USA) (NYSE:AUY) is the one gold miner where it may pay to be a contrarian. The company’s low costs and small size mean that it will be able to grow its production and profit, even if gold is in a bear market.
The article Is Now Really the Time to Be a Contrarian? originally appeared on Fool.com and is written by Joshua Bondy.
Joshua Bondy has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Joshua 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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