Major gold miners on an uptick

As fresh sovereign debt crises unfold and fears mount over a possible second recession, investors continue to look to gold as a leading safe-haven investment.

Reacting to the latest news that France might be next in line to have its debt downgraded by ratings agencies, gold soared to new heights on Wednesday, Aug. 10. New York spot gold closed up US$51.30 to US$1,795.40 after hitting an intraday high of US$1,799.20, while Comex gold futures for December delivery touched above US$1,800 an ounce for the first time, peaking at US$1,801.

Shares of major gold miners received a welcome boost this week, after languishing for much of the past two years despite the price of gold nearly doubling from around US$950 in August 2009, an approximate 89% rise. The S&P/TSX Global Gold Index is up 36.7 points since Monday and at 407.8 points now sits around a three-month high. The index averaged around 305 points in August 2009, making for an approximate 33% gain over the past two years.

Canada’s three largest gold miners have seen their shares rise sharply since Monday as gold has risen over US$110 or about 7% from last week’s close of US$1,663, when ratings agency Standard & Poor’s downgraded United States’ debt from AAA to AA+. Barrick Gold (ABX-T, ABX-N) is up $4.83 to $49.72, Goldcorp (G-T, GG-N) is up $5.17 to $50.54, and Kinross Gold (K-T, KGC-N) is up 95¢ to $16.31.

The miners’ shares still have a long way to go, however, if they are to catch up with the price of gold.

Barrick traded for around $37.50 in August 2009, shortly before the company ridded itself of its costly hedge position for around US$5.6 billion. Barrick’s second-quarter earnings this year totalled US$1.18 billion based on gold production of 1.98 million oz. at net cash costs of $338 per oz., compared with earnings of US$492 million in the second quarter of 2009 on gold production of 1.87 million oz. at net cash costs of $360 per oz. Its stock is up 32% over the period.

Goldcorp similarly traded for around $38 in August 2009, resulting in a 35% gain on paper over two years. During the second quarter of 2011, the company earned US$489 million based on gold production of 597,100 oz. at net cash costs of US$185 per oz. It lost US$232 million in the second quarter of 2009 as a result of a US$326-million foreign exchange loss, which stemmed from a revaluation of future income tax liability. Second-quarter 2009 gold production was 582,400 oz. at net cash costs of US$308 per oz.

Kinross traded for around $21 in August 2009, making it the worst performer of the three majors with a 22% decline. Part of the stock’s poor performance can be attributed to Kinross’s US$7.1 billion decision in August 2010 to acquire Australia’s Red Back Mining, which many investors saw as expensive even at US$1,200 gold. The company earned US$261 million in the second quarter of 2011, well up from net earnings of US$19 million in the same period two years ago. Gold production increased over the two years to 676,245 gold-equivalent oz. from 560,479 gold-equivalent oz., with net cash costs simultaneously rising to US$513 per oz. from $382 per oz.

Though the world’s largest gold miners should stand to benefit from continued safe-haven demand amid record-high gold prices, even they are not necessarily exempt from the effects of another recession. In the throes of the 2008 market panic, for example, Barrick fell to $22, Goldcorp to $17.77 and Kinross to $8.96. As for the metal itself, it dropped from a high of US$1,002 per oz. in March 2008 to a low of US$734 in late October.