One of the rules of thumb to follow when investing in the commodity space is that you can never go too wrong purchasing the low-cost producer. You might not get the greatest bang when times are good, but in risk-adjusted terms, these are the players you want to own.
The logic is simple. The low-cost producer should have the fattest margins. Therefore, they are going to remain profitable longer than any other in the industry if/when the commodity in question rolls over. This is just one of a number of important considerations to make before you invest, but a good one to keep in mind nonetheless.
Running with this low-cost thread, there’s a great “infographic” up at Visual Capitalist that provides a cost-related overview of the gold industry, and compares the cost profile of 4 senior producers.
Historically, gold companies have reported “cash costs” per ounce when reporting their financials. These consist largely of direct costs associated with mining, plus/minus some ancillary items like by-product credits and royalty payments.
Cash costs however drastically miss-the-mark communicating the true costs that go in to producing an ounce of gold. Significant items like mine development expenditures and sustaining cap-ex are left out of this slimmed down figure.
Companies have only recently begun reporting their “all-in sustaining cash costs” which include these formerly excluded items.
The table below pits 4 of the world’s major gold producers against each other and compares their “all-in sustaining costs”. Evidently, Barrick Gold (TSX:ABX) is the cream of the crop.
All-in Cash Costs
Source: Visual Capitalist
These figures are backwards looking and don’t necessarily reflect the respective cost profiles of each going forward. However, it’s a handy metric to keep in mind when you’re trolling for gold names, or resource companies in general.
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Fool contributor Iain Butler is short $32 July 2013 put options on Goldcorp and owns shares of Barrick Gold. The Motley Fool holds no positions in any of the stocks mentioned at this time.
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