Buy low, sell high. It's as easy (it seems) as falling off a log. Baron Rothschild put it another way, saying "buy when there's blood in the streets." But it's never that easy to steel oneself to act in the face of disaster.
The gold price had an "annus horribilis" last year, and gold shares fared even worse. At some point, and that could be early this year, a bottom in the gold price may well develop and hit the price of successful gold mining companies. Take St Barbara (ASX: SBM) for instance. Its price fell from $1.50 to $0.23 last year, that's a fall of 85%, compared to only 19% for ETFS Physical Gold (ASX: GOLD) during the same period.
St Barbara's assets include its Leonora mines in Western Australia, the Simberi mine in Papua New Guinea and Gold Ridge mine in the Solomon Islands. The company is well established with total resources of 16.6Moz Au, including ore reserves of 5.7Moz Au. St Barbara has a target of reaching an annual production rate of 500,000oz from three operations by 2014.
Gold miners can be classified as substantial producers (annual output at over 200,000 ounces); small to medium producers (less than 2000,000 ounces per annum); and hopefuls. The latter comprises many companies exploring for gold but yet actually producing. There are only a handful of substantial producers, including Newcrest Mining (ASX: NCM), Regis Resources (ASX: RRL) and Beadell Resources (ASX: BDR). While Newcrest produces the most gold, it has been unreliable with a history of unexpected production downgrades. Regis and Beadell, on the other hand, have been increasing production in recent years without the type of problems experienced by Newcrest.
Although it weighs in at number 12 in terms of the market capitalization of Australian gold miners, St Barbara is right up there with the substantial producers, reporting 60,000 ounces mined in the second quarter this financial year. What's particularly important is that St Barbara has relatively low overall cost of production. So even if gold falls to US$1,000, it is still in the money. It's those small producers having a high cost of production that are at risk of failure.
Foolish takeaway
Sooner or later, gold will go up in price. St Barbara, advancing to being a half million ounce annual producer, will improve its earnings per share substantially. It won't stay number 12 much longer, as the share price will outperform most, if not all, its competitors. With excellent management, large reserves, relatively high grades and low cost of production, St Barbara is a stand-out choice for the courageous and patient.
