The spot price for gold fell around 3.5% from as much as US$1,380/oz to US$1,330/oz since last week. It may test US$1,300/oz before too long. Gold mining companies have to be prepared for the worst and get their production costs down as much as possible. If they don't, then investors will mark them down quickly.
Here are two gold miners that are working on reducing costs and raising production. It's still a work in progress, but if you follow them closely, you will be able to see when the momentum changes toward higher earnings.
Regis Resources Limited (ASX: RRL) had 8% higher gold sales in the six months ended 31 December 2013, but lower milled head grades caused an increase in production costs. This resulted in a 32% fall in net profit to $45.6 million.
In FY2013, it achieved a record net profit of $145.7 million and paid out its maiden dividend of 15 cents per share.
It has three mines in operation. The newest one, its Rosemont Gold project, started only two months before the 31 December end date, so H2 FY2014 will have a full six months of production. The company projects production capacity will be about 100,000 oz per annum for the mine by June 2014.
Resolute Mining Limited (ASX: RSG) reported for the 6 months to 31 December that revenue was down 14% due to weaker gold prices. It was also down in production compared to H1 FY2013.
Higher cash costs contributed to half-year profits dropping to $23.3 million, down from $96.1 million in H1 FY2013. Company guidance for FY2014 projects 345,000 oz of gold to be produced and its all-in sustaining cost will be $1,175/oz.
The company has produced gold for many years, with revenue slowly rising. Profits are becoming more stable and since 2011 statutory net profit has been trending up. Higher gold prices will benefit it as it improves on its production costs.
Foolish takeaway
It can be difficult for an investor to project long range expectations on companies like gold miners that produce a commodity, even if it is a very valuable one.
Unless there are catalysts that clearly are driving the gold spot price up, profit margins and cost control are the two major things you have to monitor to estimate investment returns.
