Friday, March 12, 2010

Major Gold Producers Deliver Stellar Earnings

Yesterday, precious metals behemoth Goldcorp (GG) reported excellent results for the quarter ended December 31, 2009, joining fellow "Big Three" majors Newmont Mining (NM) and American Barrick (ABX) in "showing precious metal mining company investors the money".  Finally!

Long suffering investors in precious metals mining stocks have had their patience tried by the underperformance of the underlying stocks versus that of the metals themselves.  The reasons were not that complex:  gold and silver miners' profitability was lagging - which might be expected given the higher prices of gold and silver themselves.

The reasons for lagging profitability were varied - including losses from ill-advised hedges to higher input costs, especially oil.  Mining is particularly energy intensive and higher oil prices immediately impact the bottom line.  So, despite higher Gold and Silver price's helping revenue, margins were not improving as oil prices soared, especially in the commodity run-up in early 2008.

Since then, precious metal prices have crept higher, while oil has remained, for the time being, in a comfortable range near $80 per barrel, thus allowing margins to improve.  In addition, the larger Gold and Silver miners, led by American Barrick, have undertaken the painful process of unwinding hedges, giving them more direct benefit from higher Gold prices.  Thus, the foundation has been laid for better earnings, and, as a result, higher precious metals mining company prices.

Goldcorp announced record gold production of 2.42 million ounces during 2009 and generated operating cash flows of $1.2 billion, a 29% increase over 2008.  Average realized gold prices per ounce were significantly higher during the quarter at $1,107 as compared to $797 a year earlier.

Adjusted earnings, which exclude non-cash foreign exchange gains and losses on future income tax liabilities, rose to $182.7 million during the quarter from $84.4 million a year ago.

According to analysts, the company is set to report earnings of $1.13 a share for 2010 and $1.67 a share for 2011, up from $0.49 in 2009.  The stock has 13 buy, 6 hold and 1 sell rating, according to The Street's Analyst ratings guide.

Newmont Mining's report was just as phenomenal.  The largest U.S Gold producer, NM reported quarterly earnings of $1.13 per share versus $0.01 in the similar quarter one year ago.  For full-year 2009, Newmont posted profit of $1.3 billion, or $2.66 a share, up from $831 million, or $1.83 per share, a year earlier.

Sales revenue was $2.518 billion on the quarter, up 90%, also beating Wall Street expectations of $2.02 billion.

American Barrick reported quarterly earnings of $.60 per share - more than doubling last year's $.27 per share, citing higher realized Gold prices.

During the quarter, Barrick completed the elimination of its gold hedges based on an increasingly positive outlook for gold, using net proceeds from both equity and long-term debt offerings.  In the last two years, Barrick has eliminated its legacy project gold hedge position of 9.5 million ounces at an average gold price of about $930 per ounce.

The process of restructuring operations to more fully take advantage of higher gold prices is paying unquestionable dividends.  And, the last roadblock to better prices for precious metal's miners has been removed.

Marko's Take

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