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Why Gold Miners?
When investors seek exposure to gold price appreciation, they will often
purchase shares in major mining companies. These are companies that
are producing gold and typically have multiple mines in operation, often
throughout the world.
Major gold producers provide the possibility of upside leverage to the
price of gold. For example, if gold is selling at $1000/oz and the cost of
production is $700/oz, there is upside leverage of $300/oz. What makes
this scenario appealing is that even if the price of gold were to decline, the
potential for upside leverage still remains.
The challenge faced by major gold producers is declining mine production
and increased demand. During the 90’s, the price of gold was at or below
the cost of production. As a result, many major gold producers curtailed
their exploration programs. From the beginning phases of exploration, it
can take from 7-10 years to bring a new mine into commercial production.
To replenish their depleting mineable reserves, major gold producers are
acquiring junior or mid-tier mining companies who have made a sizeable
discovery or have recently gone into commercial production. The cost of
acquiring these junior or mid-tier mining companies can limit the upside
potential for major gold producers, but it can also reduce their overall risk.
A common way for investors to gain exposure to these major producers is
to buy shares in a mutual fund that specializes in gold or precious metals
companies. By examining the top 10 or 20 holdings in these mutual funds,
an investor will uncover many of the major mining companies.
Some investors prefer direct exposure to individual stocks. Major gold
producers typically have larger market caps, and in most cases, can be
purchased both from brokers and through online trading accounts. Many
brokers are restricted from buying stocks with share prices of less than
$5.00 because their firms consider these stocks to be “penny stocks”.
With some firms, the threshold is as low as a $1.00
Because of their higher market caps and share price valuations, many of
the major gold producers are considered to be “mature” stocks and are
often viewed as less volatile than their junior mining and exploration
counterparts.
Major mining producers trade on senior stock exchanges like the New
York Stock Exchange or the Toronto Stock Exchange.
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