There’s been plenty of good news from the gold fields this week.
The yellow metal is up this week on worries about Greece’s teetering debt and what might happen to Europe and the euro (not to mention other paper currencies) if this is just the first act of an epic fiscal tragedy co-starring Spain, Ireland, etc.
And the miners are looking up as well.
Both Barrick and Newmont, two of the three largest gold miners in the world, reported a doubling of their quarterly earnings this week. The results were driven by higher gold prices, increased production, strong demand from investors and jewelry producers, buoyant copper prices, and in Barrick’s case, the impact of dehedging and lower cash costs.
The chart above is from our Investor Alert last week and it shows an interesting trend since the beginning of 2009. The price of copper, driven largely by China demand, has climbed at a much brisker pace than that of gold. But at the same time, the stock appreciation for the pure-play gold miners has been significantly greater than that of gold companies with base metal byproducts.
This might not be intuitive – after all, a company mining gold and another resource with strong prices might be expected to be in an advantageous position compared to one reliant on gold alone. It seemed to work for Barrick and Newmont in the latest quarter.
But the price tag for developing a copper-gold project can be many times greater than that of a pure-gold project – this can add a lot of weight to the company’s cost structure. On top of that, copper and other base metals tend to see more price volatility than gold, and that can affect valuation.
A number of large gold companies have recently signaled that they plan to build copper mines that have byproduct gold potential. These projects require $3 billion to $4 billion each, so there won’t be many of them.
But still it brings up an interesting question: Will the copper miners allow their markets to be disrupted by gold miners? These byproduct producers would look to sell all the copper they can to subsidize (at least on paper) their gold production costs. This scenario carries its risks – efficient copper miners could crush these marginal projects during periods of price weakness.
The following securities mentioned in this posting were held by one or more of U.S. Global Investors family of funds as of 3-31-10: Barrick Gold Corp., Newmont Mining Corp.