We’ve been talking a lot about gold these past few weeks and lucky for us, most of the big miners are reporting their earnings this week.
Here are three miners that I find especially interesting.
1. Detour Gold
Detour Gold (TSX: DGC) is a gold mining company primarily invested in the biggest gold mine in Canada. The Detour Lake mine is located in Cochrane, Ontario, and is the major source of the company’s assets. The project is ramping up production — currently working to increase the yield of gold ounces retrieved — and is the major source of both upside and downside risk.
The company reports on July 29, and I will be especially interested in hearing management’s update on the progression of the overburden removal — that is, the excess rock that is piled up around the mine. The company estimated that it would be able to remove 86,000 tonnes of overburden per day this last quarter. Any delay could cause a slowdown in the mining of gold due to additional resources being dedicated to the clean-up crew.
Another important note will be the grade recovered from the operation of its mines. Management seemed optimistic that it could increase the grade of gold recovered per tonne mined due to in part overburden removal.
The bottom line is that when I listen to Detour’s conference call this week, I will be focusing on operations and execution.
2. Centerra Gold
Next in line is Centerra Gold (TSX: CG) which also reports on July 29. However, unlike Detour Gold, when I listen to Centerra’s conference call I will be concentrating on political risk.
Both mines in operation under the company are located in politically risky countries — one in the Kyrgyz Republic, the other in Mongolia — that in the past have been known to cause problems for foreign operators. Just last quarter, the Kumtor mine — Centerra’s main mine, holding 80% of the company’s assets — located in the Kyrgyz Republic, was at risk of shutting down due to regulatory approval. In the end, the company managed to get all the required certifications to keep the mine in operation, but the risk is still present.
Right now, the Kyrgyz Republic owns a substantial part of the Kumtor mine. Back in 2013 rumours circulated that there could be a vote in the country’s parliament to increase that interest to 50% in a joint venture with Centerra Gold. Since then the plan failed, but it goes to show that operations in this part of the world are very risky politically.
I highlight the importance of the Kumtor mine because it holds 80% of the assets of the company, and any shutdown or slowdown in production would significantly impact the company’s profitability.
3. Barrick Gold
Last but not least is Barrick Gold (TSX: ABX)(NYSE: ABX), the world’s biggest gold producer, but far from the best operator.
Here, the story is one of cost control and restructuring.
Barrick is the best example of a company that invested carelessly back in the gold rush years of 2008-2011 and is now paying the price. Since 2011, management incurred massive due to assets that had a breakeven price way too high to be feasible. Ever since, the company has been on a quest to cut costs and bring debt back to reasonable levels.
When I listen to its conference call, I will be focused on balance sheet items and where it stands on interest coverage and its net debt-to-equity ratio. This is because, unlike our other two miners, Barrick made some bad decisions before 2013.
Wall Street estimates gold output to be at 6.3 million ounces of gold for 2014, lower than the 7.2 million ounces it produced last year. I will be curious to hear what management has to say regarding production and how it links up to increased profitability in the coming years.
The bottom line
The companies mentioned each pose their own specific risks. With the amount of coverage that gold has been receiving these past few weeks, one thing is for sure: There will be movement in these stocks this week.
If I had to rank them, I would say Detour Gold seems the most promising, with Centerra Gold being the least. I might be wrong, but I don’t like investing in a company that is exposed to such high political risk.
