3 Gold Companies for Golden Returns

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

According to the World Gold Council, 2011 was the golden period for gold as global demand for gold increased 0.4% to 4,067 tons at an estimated value of $205.5 billion, the highest level, exceeding $200 billion, since 1997. The increase was mainly due to the investment scenario in India, China, and Europe.

Gold demand was 1084.6 tons in the third quarter of 2012, down 11% from the historic high level of 2011. This was mainly due to a 2% dip in global demand for jewelry to 448.8 tons due to unfavorable economic conditions. With such volatility, gold miners are under pressure to decrease operating costs and improve margins.

Let's discuss what strategies the three gold mining companies I am discussing here have chosen in this volatile market.

Growth in new mines

With new mines in Canada and Argentina, Goldcorp (NYSE: GG) is planning to boost its production by 50% and reduce its operating cost by 2017. Goldcorp's capex is estimated to reach $2.8 billion by mid-2013, which is approximately $1 billion higher from 2012. A major portion of the capex, $775 million, has been allocated to Cerro Negro, Argentina.

The significance of the project for this region lies in the fact that the unemployment rate of Argentina is increasing. The project is expected to create 1,000 direct and indirect jobs, which will help decrease the increasing unemployment rate of 7.9% in the first quarter of 2013, compared to 7.1% in 2012.

In Cerro Negro, under the pre-exploration program, reserves increased 177%, from 2.1 million oz. estimated at the time of acquisition in December 2010 to 5.7 million oz. in the first quarter of 2013. The project is expected to start operations in early 2014, producing 314,000 oz. of gold. Gold production from the project is expected to be 550,000 ounces/year during the first five full years of operation at a cash cost of less than $200/oz. Based on current reserves, the annual production over 12 years of the life of the mine is expected to be 340,000 ounces/year at a cash cost of $290/oz.

Goldcorp's flagship mining project in Red Lake, Ontario, in Canada outperformed in the first quarter of 2013. It produced 146,000 oz. of gold at a cash cost of $476 per oz. against the estimated 116,000 oz. at $569 per oz. This growth was due to an increase in the number of mining heads in the last quarter of 2012. Goldcorp has planned to spend $40 million in 2013 in Red Lake for increasing existing resources from its new mining area, the “NXT zone,” and to build a haulage drift.

The objective in the NXT zone is to grow existing gold resources and convert them to reserve. A new 5 km haulage drift, to be completed by the fourth quarter of 2013, will add to the production capacity of Red Lake. This drift is made to link Red Lake and the Cochenour complex. Upon completion of the drift, gold production from Cochenour is expected to be around 250,000 ounces per year, which will add to the 507,000 ounces per year of gold produced by Red Lake in 2012.

The Cochenour complex will start its commercial operation in the first half of 2015. Due to these developments, the company expects gold production to surpass the 507,000 oz. of 2012. 

Better future with growth in gold and copper

In the first quarter of 2013, the African market produced 625 - 675 kilo oz. of gold at a cash cost between $525/oz. - $575/oz. for Newmont Mining (NYSE: NEM). To add to this burgeoning market, Newmont’s main development project, Akyem, in Ghana, is expected to start production in late 2013. Akyem is expected to produce 350 – 450 kilo ounces at a cash cost of $500/oz. - $650/oz. in the first five years of production.

The U.S. Geological Survey website reported in 2012 that Ghana was the tenth largest gold producer globally. Ghana’s mining sector is set to reach $730 million in 2017, from $669 million in 2012, due to its gold production. This gold-rich region will help in the long-term growth of Akyem. Due to this project, the company's gold production is expected to increase from 70 kilo ounces by the end of 2013 to 200 kilo ounces in 2014.

On the other hand, Copper production increased from 35 million lbs. in the first quarter of 2012 to 38 million lbs. in the first quarter of 2013. To fortify copper production, Newmont authorized the full funding required for the completion of the Phoenix Copper Leach project in Nevada in April 2012. Capital cost is anticipated to be between $170 million and $215 million, out of which $106 million was already spent by March 2013. The project is expected to start production by the end of 2013, generating value from what is currently thrown away as waste material.

The Phoenix copper project is expected to produce approximately 20 million lbs. of copper per year for the first five years. Due to these developments in copper production, Newmont has raised its revenue growth estimation of its copper production from 6.2% in the first quarter to 10.1% in second quarter of 2013. 

Safe investment owing to new growing mines

Barrick Gold (NYSE: ABX) makes money from the spread, or difference, between the price of gold and cost of production. Barrick's production cost for the first quarter of 2013 was $561/ounce. With two new projects, Pueblo Viejo and Pascua Lama, the company expects gold production at a much lesser cost. Pueblo Viejo's cost of production to operate is currently at $325/ounce. The Pascua-Lama mine, commencing in the middle of 2014, is expected to produce gold at an even lesser cost than Pueblo Viejo's.

In 2006, Barrick got approval from the environmental authority in Chile to construct Pascua Lama, a gold mining project in Vallendar, Chile. Barrick spent $4.8 billion by the end of first-quarter 2013 for the project. Though the project faced environmentalists' litigation earlier, in May 2013, Barrick reported that it had received a resolution from Chile's Superintendent of Environment that requires the company to complete Pascua Lama's water management system in accordance with the project's environmental permit.

The project will create 5,500 jobs during its construction stage in 2013 and is expected to produce 1,660 jobs annually over 25 years of operation. This will help in decreasing the current unemployment rate of 18% in Vallendar. The project is expected to produce 800,000 – 850,000 ounces of gold annually over the next five years. This production will cause the company's EBITDA to rise from $5.8 billion in first quarter of 2013 to $6 billion by the end of 2014.

The Pueblo Viejo mine began production at the end of 2012. It expects to operate at $325/ounce, which is quite low, when the company's overall cost of operation was $561/ounce for the first quarter of 2013. To appreciate the significance of Pueblo Viejo, Barrick raised its capex to $8.5 billion, from an initial estimate of $3 billion. The company produced a total of 7.4 million ounces of gold in 2012. Barrick expects to produce 800,000 - 850,000 ounces of gold annually from this mine, adding to its growing production level.

Pueblo Viejo is estimated to generate income of more than $7 billion during its first 25 years of operation. Recently, Pueblo Viejo reached an agreement with the Dominican government. The agreement shows the government receiving around $2.2 billion over the period. Hence, the mine proposes growth for both the company and the government.

Conclusion 

Goldcorp is developing its mine in Red Lake, Canada and Cerro Negro, Argentina. The company has profitably bet on Canada and Argentina for long-term growth.

On the other hand, Newmont is trying its hand in the burgeoning Ghana market with its Akyem mine and copper segment.

Barrick Gold is following Goldcorp's steps and bidding for new mines, Pueblo Viejo and Pascua Lama, for proliferating growth.

So, I recommend a buy for all these stocks.

Goldcorp is one of the leading players in the gold mining market. For the last several years, investors have been the beneficiaries of several successful acquisitions and strong organic growth. Goldcorp's low-cost production of one of the most sought-after metals in the world continues to make this stock an attractive choice for long-term investors. To learn everything you need to know about this mining specialist, you're invited to check out The Motley Fool's premium research report on the company, which comes with a full year of ongoing updates and analysis to keep you informed as key news breaks. Click here now to claim your copy today.


Madhu Dube has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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