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This Factor Could Propel Gold Mining Stocks Much Higher In 2015
Analysts seem to be falling over themselves to explain the causes and consequences of the low oil price which is still trading below $60 per barrel as of today. As we are predominantly focusing on the precious metals sector, we are obviously very interested to see what the effect of a lower oil price is on the price of gold and the financial performance of gold mining companies.
If we look at the charts, the gold/oil ratio has increased incredibly fast to a ratio of around 22, coming from just 13 in early October. The Relative Strength index shows the ratio to be in an ‘overbought’ territory which could very well mean that the ratio will come off a bit, either by a lower gold price (not very likely) or an increase in the oil price (which is already more likely).
This isn’t a unique situation though. Even though the oil price is indeed trading at its lowest level in approximately five, six years, we don’t have to look that far back in time to find a higher Gold/Oil ratio. Just two years ago, at the end of 2012 we also had a ratio in excess of 20, so the 2012-2014 period could be seen as an abnormality which can be seen on the next chart as the Gold/Oil ratio has been trading at its lowest point in six years time.
As gold-focused analysts, we are obviously also extremely interested to know the impact of this oil price on the production cost of gold. And that’s where we enter dark and unexplored territory as there’s virtually no information about this topic. That’s understandable as every mine has its own needs depending on a zillion of factors of which the most important factor obviously is whether or not the mine is located close to a ‘civilized’ area.
As the average energy consumption to produce a kilo of gold is between 150 and 300 Gigajoules , the mining sector obviously is a sector with an extremely high consumption of energy and the fate of a project could be decided by whether or not it could be hooked up to an existing power grid. This has obviously put companies operating in remote areas at a disadvantage compared to other mining operations. Agnico Eagle’s Meadowbank mine in Nunavut, for instance, has no access to the power grid and all diesel fuel needs to be hauled in. At a consumption rate of 200,000 liters of diesel per day, you’d think the impact of a lower oil price would be noticed by Agnico Eagle. This is theoretically true, but as the mine is operating quite far up north, the company needs to make sure it has a sufficient amount of fuel before the winter kicks in. As the oil price only started to slide in October, it sure looks like Agnico has purchased its ‘winter fuel’ for the Meadowbank mine right before the oil price crash and is stuck with the higher cost fuel.
The effect for African and South American mining companies will be much higher as those aren’t really depending on stocking fuel for the season. As the power supply on the existing grids is also highly unreliable, the best option for African gold producers is to buy diesel generators. For instance Endeavour Mining’s Tabakoto mine (which will produce 150,000 ounces of gold this year) is fully depending on the electricity generated by diesel fuel. The cost of power is thus relatively high at $0.25/KWh which compares quite bad with for instance Detour Gold which pays $0.055/KWh as the company is operating in Canada and connected to the power grid. The Tabakoto mine plan took a diesel cost of $1.09/l into consideration at a time when the oil price was trading around $100 per barrel. There’s an automatic correction system in place in Mali so the fuel price goes down at a slower rate than the oil price. So if we would now take a 15% lower diesel price into consideration, that would save the company roughly $0.16 per liter.
As that specific operation needs 35-40 million liters of diesel per year, the annual savings because of the lower oil price could easily be $6M. This doesn’t sound like much, but for a relatively low-margin operation, producing 150,000 ounces per year, that’s a saving of roughly $40 per produced ounce. That’s 40 dollars being shaved off the all-in cost per ounce and will directly impact the bottom line as well. The same numbers apply to Nevsun Resources, another Africa-focused diesel-powered mine which is producing copper.
And it’s not just Africa. Large-scale operations such as Barrick Gold’s Cortez Hills or Pipeline mines in Nevada which is using some of those gigantic trucks to haul ore and waste rock around. These trucks consume on average 700 liters of fuel per hour, or roughly 15,000 liters per day. This means that with a fuel cost being reduced by $0.20/l, Barrick could save approximately $3,000 per day, per truck. As Barrick will deploy roughly 50 trucks, the total saving is approximately $55M per year. And this only takes the big trucks into consideration and ignores all the other equipment so the total savings per year will be in excess of $75M. Again, this goes directly to the bottom line of the earnings report.
We have the impression the impact of the lower oil price on the gold mining sector is (conveniently) being ignored by the market, and that’s where you could have an advantage which proves the theory of efficient markets is effectively dead. We are expecting the ‘remote’ gold projects which are running on diesel fuel to show (much) better than expected operating results due to the lower oil price resulting in a lower (diesel) fuel price. We are excited about this development and you should be too as the operating expenditures will go down resulting in an increased profit margin.
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the bull market in gold miners is going to climb a wall of worry. when the next shock goes through the global economy the supply of gold will dry up. sellers of gold will find no price in fiat that satisfies them. that leaves only new supply to fill the void. the miners will bring enough supply to market to satisfy that need, at their price, they will have pricing power.
as retail consumers see their pension funds looted, their bank accounts bailed in, they will buy a little gold each month. there is not going to be enough for the wholesale or central bank clients, but retail will keep the market going. the central bankers will remain outside the market, its similar to what happens on the NYSE when one fund wants to sell off a large piece of stock (a block trade) they have to find another large buyer, otherwise if they sell shares into a LOW VOLUME market they will drive the price down to nothing. (if A sells 100K shares to B, (avg daily vol 1K, it would take 100 days) B agrees to pay market price, for FUTURE CONSIDERATION, or some quid pro quo. but in a market where no one trusts the other guy, those deals won't get made, does China trust Russia trust the US, nobody trusts anybody.
a low volume market prevents large holders from dumping shares, stocks or gold, or gold stocks. the central banks will need their gold, after irate politicians demand to see the receipt. so the rehypothecation game goes off. prices go higher, and the sum of all that rehypothecated gold in the current market gets closer to ONE. (beware the etf)
the really important part though is a sustained bull market in gold and mining shares, 10 - 20 years anyway. one certainty is that in that time frame a gold mining stock must be added to the DOW30. then you know the time has arrived. one other item related to currency, countries with large gold reserves, and small currency float, can back their currency with gold, making it instantly more valuable. and this is really important, the markets count oil in reserve, but they dont count gold in reserve. if you know your mine is loaded, why do you need to mine that gold to use it to back your currency? you don't. the technology is such that pretty soon we can determine these things more accurately.(just for laughs americans gold is in fort knox, and country XYZ has the same amount buried under a mountain. who's telling the truth? have they audited the US gold reserves lately?)
finally lower fuel prices are a catalyst. and heres the real bottom line to me, if the global meltdown doesnt happen and the global economy recovers, (because of low fuel prices, lower costs to do business period) shouldnt gold enjoy participate in the general economic recovery? and since americas new gilded age includes a lot more poor people than it used to, the poor around the world are the retail customers of gold. gold is in some ways recession, and depression proof.
Eric/Rick, I'm not really buying your thesis. For remote areas running on generators the cost of the fuel just is not significant. Transportation of the fuel, storage, and generator maintenance are crazy expensive. I have not done a detailed analsys, but I suspect the variability of transporation, storage, and maintenance are larger than the drop in the fuel cost. You might do better studying weather patterns to get an idea of their changing costs than to study fuel. To simply draw a correlation between fuel and mining costs is a bit too simplistic.
But maybe I am wrong. :)
Shock and awe 4th quarter will be reported for the PM miners. Not just fuel costs, but currency translation benefits as well.
I'm very happy with the miners I've invested in. Although I'm small time and just getting started, I pulled in enough last week to cover this months utilities. The price is nice too, I can actually afford to buy enough stock at $4-$5 a share to start make it worth while. And for anybody whose never played...it's super easy now with online brokers. Open a Scottrade account, start with $1,000...$5,000....$500...whatever. Buy some CDE or AUY or AG and it will grow if you work it. Learn how to set stop sell orders and away you go....plus it's fun. Nice way to add to your stack without playing the paper gold game and the miners appreciate the support.
Huh...?
i have a number of reasons why should own gold stocks, but it has nothing to do with the standard causes, economic collapse and inflation, no i actually believe gold will LEAD the economy, and it will be a consumer choice. after the stock market and 16 years of bush/obama selling your economic advantage into the global market, now you are as poor as some guy in Mubai, and you will acquire the same values, and that is (spiritual) values and of course gold. study the matter, your middle class lifestyle is over, you know that, and you are one stock market crash from poverty. and the poor embrace gold.
How many times must you be told: There are no markets. Only manipulations. By governments and oligarchs Companies and people with money... lot of money.
True, true, and sooo true.
But remember, they suffer blowback, and that blowback is almost constant now. Even the elites/oligarchs must be feeling helpless by now ( and only more dangerous).
On a weekly chart, GDXJ: $WTIC has been in a horizontal channel for a year and a half. Right now, GDXJ: $WTIC is at the top of that channel. Going back another year and a half, GDXJ: $WTIC was 2 or 3 times higher, so maybe GDXJ has room for upside (or $WTIC room for downside?).
Ask, who owns sony?
The rockefellers who own the al-CIA-duh/isis/is/us govt supported terrorist stooges.
http://www.answers.com/Q/Did_John_D_Rockefeller_own_SONY
Miners are the place to be for value!
It makes perfect sense that lower energy costs would benefit energy-intensive operations like gold mining.
And Cabbage Patch Dolls are going to make a comeback too, I hear.
Mining stocks have been absolutely slaughtered - I have yet to hear good reasons for it.
Taken to the wood shed, beheaded, bled, and plucked. Sheesh.
pull up a chart of the XAU versus the Dow30, back to 94, now watch what happens to the gold miners, (they get slaughtered) the XAU eventually goes into the 40s. then the market crashes in 2000, and the XAU keeps moving along. then in 2002 the XAU begins to lead, DOW goes to 6000, and gold miners lead the market all the way until recently. of course the time lag may require some patience, the XAU may have farther to fall, or it may be different this time, but if anything the stock market is more pumped up on fiat steroids than ever, and government debt is already hyperbolic. and the equity market relative to gold stocks is overvalued by quite a lot
"Mining stocks have been absolutely slaughtered - I have yet to hear good reasons for it."
Ten days ago this long article argued that a long yen/short gold trade was responsible.
http://www.zerohedge.com/news/2014-12-04/inside-look-shocking-role-gold-new-normal
By logic then the weak hands have been washed out. Cowboy logic says I'm a buyer.....
Agreed, but with so much manipulation in the metals themselves, the mines have been gamed and suppressed at the same time. Gas is cheap now and PM's have remained strong - so the mining stocks should be triple what they are.
Instead the money has gone into intangible IPO's, Social Media, and Tech Bubble 2.0.
eric sprout
... or ... it leaves more room for gold to fall in dollar terms while maintaining supply just like in the 90's, another period of falling gold and oil prices and a rising $.
it"s indeed the most likely and it wouldn't be bad because it would push a lot of juniors off the cliff and create a bigger squeeze on the price up when supply lowers.
I'm watching ETF's like GDXJ and JNUG and I'm just glad I didn't jump in a few months ago as they're trading at all time lows right now. But on the other hand, if gold holds the next 2 weeks, I might jump in.
Just stack 'em and pack 'em...
#Nucleartracktown
Deadwood to Florence. Say hi to Byron.