Investment in gold is quite popular as it offers a hedge against inflation, currency fluctuations, economic slowdown and other benefits. But a less commonly-known fact is that that investing in gold stocks can also act as portfolio diversifier. Purchasing physical gold has its own share of shortcomings, so alternatives to it are, to buy shares of gold mining companies, gold ETFs (exchange traded funds) or futures and option contracts. Savvy investors routinely gain exposure to the precious metal by buying stocks of gold mining and exploration companies. So, in this article, we’ll enlist a number key parameters and risk factors that you should be looking for, when analyzing gold stocks.
How to Invest in Gold Stocks?
Although this isn’t a regulatory requirement, but almost all major companies involved in the mining, exploration and processing of physical gold report the following parameters. It’s important to understand these metrics and their implications, to better evaluate their prospective investments. These parameters are:
- Gold production: This is a fairly straightforward metric. gold production usually means the concerned company has more gold to sell, and generate revenue off of. In other words, we can think of this metric has the revenue generating potential for gold mining companies. Given the importance of this metric, companies involved in the trade report gold production on a quarterly and on an annual basis.Investors should look to invest in companies that have been growing their gold production. This indicates a growing future revenue potential, highlights the management’s smart capital allocation strategy and opens the possibility of stock price appreciation in the coming subsequent quarters. On the other hand, companies that report shrinking gold production might be facing mining issues, face the risk of continued financial decline and should generally be avoided.
- Gold Recovery Rate: After dirt and ores are extracted from the mines, they need to be processed and refined to extract usable physical gold. The amount of gold extracted from these ores, is known as the recovery rate. For example, a company that’s able to generate 1kg gold from 1000kg of ores is better off than another company that generates 1kg of gold from 1 million kg of ores. Greater gold recovery rate would mean higher ounces of gold being processed from the same amount of ores, making it a more profitable venture. Thus, look for companies with a high gold recovery rate.
- Operating/Production Costs: For gold companies, operating costs are usually classified under the following criteria:
- Mining Cost: These costs refer to all the costs related to excavating the ore such as fuel cost, mine equipment costs, explosive costs and fuel costs,
- Processing Cost: Cost associated to the plant where the ore is processed into gold like power and utilities, plant engineers, lease, water treatment, etc. fall under this category.
- General and administrative Expense: It comprises salaries, environmental costs, taxes and so on.All these costs are expressed mostly in USD per ounce .
- Reserves and Resources: More gold reserves generally mean that the concerned company can continue gold production in a steady, stabilized manner into the future. It reduces the risk of running out of gold mines, or even shrinking recovery rate. In other words, high amounts of gold reserves point to untapped resources which can secure and stabilize the company’s future revenues. On the other hand, companies with low or shrinking gold reserves may have invest in more gold mines to maintain their sales or they faced with the risk of a entering a financial decline. Per our database at Business Quant, top 10 gold mining companies ranked by proven & probable reserves are as follows:
| Company | 2019 Au Reserves, Moz | 2018 Au Reserves, Moz | % change | |
| 1 | Newmont | 100.2 | 65.4 | 53.2 |
| 2 | Barrick | 71 | 62 | 14.5 |
| 3 | Polyus | 61 | 64 | -4.7 |
| 4 | Newcrest | 52 | 54 | -3.7 |
| 5 | Gold Fields | 49.3 | 48.1 | 2.5 |
| 6 | AngloGold | 43.9 | 44.1 | -0.5 |
| 7 | Kinross | 24.3 | 25.5 | -4.7 |
| 8 | Harmony Gold | 23.72 | 23.8 | -0.3 |
| 9 | Polymetal | 23.7 | 22.3 | 6.3 |
| 10 | Agnico Eagle | 21.6 | 22 | -1.8 |
| Total | 470.72 | 431.2 | 9.2 |
- Operating Profit Margin:Operating Profit Margin= (Operating profit/Net Sales) x100, where
Operating Profit = Net Sales-Operating expensesThis ratio tells the investors that how effectively, a company manages its costs, and it is important for a mining company as they continuously have to revise their production levels by fluctuating operational costs. A strong operating profit margin indicates a better managed business and, in our view, is a strong key performance indicator.
- Total cash costs per ounce of gold: This metric refers to the total cost incurred by a company in selling every ounce of gold. The costs here are generally comprised of operational and mining expenses. This highlights the operational efficiency on per unit basis. If a company has an inefficient operation and involves a number of redundant processing steps, its cash cost to produce an ounce of gold is likely to be high. Whereas, companies with efficient and streamlined operations are likely to report lower cash costs per ounce of gold. So, investors should look to invest in quality stocks, that have a history of reporting relatively lower cash costs per ounce of gold. These companies have the best chance to maximize shareholder returns.
- Sustaining cost: For a company to run its production, regular repair and maintenance of equipment becomes mandatory. Besides, there are several other necessary expenses that companies have bear, in order to sustain their operations effectively and efficiently. All such costs fall under the head ‘Sustaining costs’. Though charges of a company to sustain its business should be low to increase its profit margin, investors should analyze these costs, look for anomalies, ensure that these costs are actually necessary and don’t include wasteful expenses.
- Average ore grade: Grade refers to the gold content in an ore. It is usually expressed in percentage terms. A lower grade ore means incurring higher cost per unit weight of the metal extracted. If a company engages in production of lower grade gold ores, then its revenue per kilogram of ore is reduced. This in return can hurt the company’s revenue and, consequently, its profitability. On the other hand, companies with a high average ore grade stand to maximize shareholder returns and excel at efficiency metrics. So, look to invest in companies that have been posting steady improvements in their average ore grade, and avoid companies that are posting deterioration in the said metric.
- Average Realized Price: Realized prices refer to the final price at which the gold is sold by the companies to its customers, after deducting all the types of discounts from the list price. On an average, companies with low realized prices may not be efficient in selling its products at competitive prices perhaps, because, it’s embroiled in a battle for market share gains or maybe it’s distribution network isn’t strong enough. So, look to avoid such companies and consider investing in stocks that post average realized prices near or above the industry averages.
- Tonnes of ore processed: After extraction, mined ores have to be processed and refined to get usable physical gold. The volume of that processed ore highlights a company’s utilization of its resources. More number of processed tonnes highlights greater capacity utilization and points to a high revenue potential. If a company reports a material decline in the amount of ores it process, then it may hint to an upcoming financial decline and operational hurdles.
- Tonnes milled: This metric highlights how many tonnes of ores is the company able to mine.
Reasons to invest in gold:
- Hedge against inflation: The price of gold tends to increase when the cost of living rises. Since decades, it’s been observed that gold prices shoot up and financial markets go down during the years of high inflation.
- Protection against deflation: When there is a slow down in economic activities and burden of excessive debt persists on an economy, prices of all commodities decline. Gold is considered to be a safe haven and so, investors across the world load up on gold to park their money.
- Portfolio Diversification: Gold has an inverse relationship with stocks and financial instruments, thus investing in gold becomes safeguards portfolio downside during macroeconomic turmoil.
Here’s a list of gold stocks listed in the US as of February 20, 2021, ranked by their market capitalization:
| Stock | Market Capitalization | Price to Sales – PS (TTM) |
| NEM | 45,783,400,000.0 | 4.1 |
| GOLD | 37,034,200,000.0 | 3.8 |
| FNV | 21,695,500,000.0 | 25.7 |
| WPM | 17,043,100,000.0 | 19.8 |
| AEM | 14,774,900,000.0 | 5.9 |
| SBSW | 12,602,500,000.0 | 3.2 |
| AU | 8,933,100,000.0 | 2.5 |
| KGC | 8,588,300,000.0 | 2.5 |
| KL | 7,561,200,000.0 | 5.5 |
| GFI | 7,200,800,000.0 | 2.4 |
| RGLD | 7,035,000,000.0 | 12.5 |
| BTG | 4,987,100,000.0 | 4.3 |
| AUY | 4,353,000,000.0 | 2.7 |
| HL | 3,186,100,000.0 | 4.4 |
| AGI | 3,095,200,000.0 | 4.5 |
| NG | 3,015,000,000.0 | 0.0 |
| CDE | 2,179,000,000.0 | 2.9 |
| EGO | 2,047,200,000.0 | 3.3 |
| PVG | 1,970,500,000.0 | 5.4 |
| SSRM | 1,877,000,000.0 | 3.1 |
| OR | 1,763,700,000.0 | 6.5 |
| IAG | 1,566,700,000.0 | 1.5 |
| SA | 1,165,400,000.0 | 0.0 |
| SAND | 1,144,900,000.0 | 12.8 |
| NGD | 1,101,800,000.0 | 1.7 |
| EQX | 1,043,800,000.0 | 3.7 |
| ORLA | 865,500,000.0 | 0.0 |
| GSS | 367,500,000.0 | 1.3 |
| GAU | 276,900,000.0 | 0.0 |
| THM | 253,400,000.0 | 0.0 |
| GLDG | 246,500,000.0 | 0.0 |
| GSV | 225,600,000.0 | 0.0 |
| GORO | 207,000,000.0 | 1.6 |
| TRX | 168,000,000.0 | 0.0 |
| CMCL | 166,600,000.0 | 2.2 |
| GDRZF | 149,100,000.0 | 0.0 |
| BFGC | 130,600,000.0 | 0.0 |
| CTGO | 129,200,000.0 | 0.0 |
| VGZ | 110,900,000.0 | 0.0 |
| AAU | 100,600,000.0 | 0.0 |
| USAU | 73,700,000.0 | 0.0 |
| XTGRF | 54,100,000.0 | 0.0 |
| LONCF | 48,600,000.0 | 0.0 |
| PZG | 45,300,000.0 | 70.1 |
| TLRS | 32,400,000.0 | 0.0 |
| CRCUF | 23,300,000.0 | 0.0 |
| HNDI | 100,000.0 | 0.0 |
(Source: Business Quant’s Sector Data)
Why gold stocks and not physical gold:
- Physical gold ownership involves a number of expenses like storage and insurance costs, mark ups related to the transaction. On the other hand, purchasing gold stocks or ETFs help investors to avoid storage and other unnecessary expenses.
- Owning physical gold also involves security reasons, whereas investors need not implement such safeguards for investing into gold stocks.
- Physical gold can also also present logistical issues, of transporting gold to jewelers whenever one has to transact. This isn’t the case with gold stocks and gold ETFs.
Final Thoughts:
Apart from considering the key parameters associated to investing in gold stocks, as an investor, one must not forget that gold prices tend to be cyclical. This means that its prices usually moves in ebbs and flows, depending on the state of the global economy. When markets revive or prove to be bullish, investors aren’t very interested in parking their cash in this safe haven, and rather invest in high-growth investment opportunities, so the price of gold tends to correction in bull phases. The opposite is also true when markets enter a bear phase. Investors look to park their cash in gold, a safe haven, and the heightened demand for this commodity inflates its prices. So, it’s important to understand the workings of gold pricing cycle and the key performance indicators associated with gold stocks.
Business Quant is a comprehensive investment research platform that hosts most of the aforementioned data points. You can track various gold stocks, along with companies from several other industries, and analyze their performance at a deep-level. View our pricing plans here; plans start at just $19 per month.