Considering the fact that gold prices have gone up so fast in the recent past that almost all investors in gold and gold mining companies' stocks must be thinking that the gold diggers are making huge profits.

However, the reality is something different. According to a Mineweb report, numbers produced by seven of the world's biggest gold miners for the first half of 2010 do not show nay great gains for the gold miners. The seven primary gold miners are Barrick, Newmont, AngloGold Ashanti, Gold Fields, Goldcorp, Kinross, and Agnico-Eagle.

The key measure of free cash flow for the seven miners for the half year aggregates at $2.3 billion, compared to just less than zero for the first half of 2009.

Average dollar gold prices for the more recent period were materially better than the comparative period in 2009, after gold prices took punishment across much of 2008. For 2009 as a whole, the aggregate free cash flow for the seven miners was $1.9bn, compared to negatives of more than $2bn for each of 2008 and 2007.

The gold miners have produced more free cash flow for the first half of 2010 than for 2009 as a whole. This is good news, but there are at least two key concerns. The first is that costs are increasing, both for daily overheads such as wages and power, and for capital expenditure - both for stay-in-business, and for new mines.

The seven gold diggers spent close to an aggregate $9bn on capital expenditure in each of 2008 and 2009. There was a marginal slow down in the first half of this year, with the total running at just short of USD 4bn. As pure gold deposits become increasingly difficult to find, gold miners are moving into mines which produce gold on the side, most typically, copper porphyries. These are costly mines to build.

Gold miners naturally highlight the gold portion of mixed production. Thus Goldcorp, which has recently completed Peñasquito, a very big and expensive mine in Mexico, highlights significant gold production, but the mine is mixed, with material output of lead, zinc, and silver.

The seven primary gold miners - Barrick, Newmont, AngloGold Ashanti, Gold Fields, Goldcorp, Kinross, and Agnico-Eagle, are collectively heavily stretched with new mine builds, and may sometimes be a little brash in acquisition targets. The recent take out of Toronto-listed African gold miner Red Back by Kinross was expensive, regardless of which analysis is applied to the transaction.

Gold miners increasingly leaning into base metals production can take a big leaf out of Freeport-McMoRan's book. The group is well-known as the world's biggest publicly traded copper miner, but it also ranks No 1 in molybdenum, and also as a global Tier I gold producer. Given a robust mix of commodity price levels, Freeport can breathe cash flow like a dragon. In the first half of 2010, Freeport's free cash flow computed at USD 2.4bn, compared to the aggregate USD 2.3bn produced by the seven primary gold miners.

In 2007, when the seven gold miners produced negative free cash flow of USD 2.1bn, Freeport's was positive to the tune of USD 4.5bn, a whopping number in any global company classification. This leads into the second key concern (after rising costs): the seemingly sacred classification of valuation. At prevailing stock prices, the seven gold miners carry an aggregate market value of USD 147bn, compared to Freeport's modest-looking USD 33bn. Barrick, alone, is valued at USD 42.4bn.

Gold bugs, a loose descriptor for a class of speculators and investors which apparently believe that gold bullion prices will simply continue increasing year after year, as in the past decade, underpin the significant premiums built into the value of listed gold producers. Gold, and gold stocks, are not for the faint hearted, or the inexperienced.
(Source: Mineweb)

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