This morning, shares of gold miner Beadell Resources Ltd (ASX: BDR) have fallen 4% following a market update on recent changes to its foreign exchange position.
Today's downward price movement is likely part of the broader sell-off in gold stocks because, on the face of it, Beadell's update appears extremely encouraging.
After recently announcing an 88% fall in net profit for its 2014 financial year, I questioned whether or not Beadell could be a "golden buying opportunity" because it had been making the right moves, operationally, to turnaround its fortunes.
Whilst some market commentators are suggesting the gold price, currently $US1,163 per ounce according to Bloomberg, could be heading sharply lower thanks to a strengthening U.S. economy (gold is seen as a hedge against inflation and economic uncertainty), Beadell is actually benefiting from a stronger U.S. economy.
With a stronger U.S. economy comes a stronger U.S. dollar – gold is denominated in U.S. dollars. Thus, any weakness in other currencies, such as the Brazilian Real (BRL), can boost profits significantly.
Since 90% of Beadell's site costs are denominated in BRL, it can keep costs low whilst simultaneously getting a higher price for the gold it sells. That's why Beadell's update today, could be promising news for shareholders.
In its "Currency Announcement" to the ASX, Beadell said its 2015 budget was set at a gold price of BRL 3,000 (equating to $US1,200 per ounce at a BRL-USD exchange rate of 2.50).
However, currently the Brazilian gold price is at a 10-year high of BRL 3,650 (a result of a $US1,167 per ounce gold price and BRL-USD exchange rate of 3.13). The BRL-USD exchange rate is also at a 10-year high, with the Brazilian Real depreciating 21% against the U.S. Dollar over the past four months alone, and 42% year-over-year.
All movements considered, Beadell says that if the current BRL gold price is maintained throughout 2015 it will have the effect of increasing revenue by $US37 million for 2015, equating to a cash flow improvement of $US27 million. In its 2014 financial year, revenue was $US217.25 million (based on my calculations with an AUD-USD exchange rate of 0.816, at 31 December 2014).
Commenting on the announcement, Beadell's Managing Director Peter Bowler said, "The weakness in the Brazilian currency is having a very positive impact on our profitability. We are fortunate to be domiciled in a country where the vast majority of our costs are denominated in the local currency which acts as a natural hedge against the continued strength in the US currency and subsequent weakness in USD gold price."
He added, "Beadell is enjoying a currency lead gold price uplift more so than Australian gold producers."
Should you buy Beadell Resource's shares?
Investing in gold stocks is a risky business. As can be seen above, profits are sensitive to volatile gold prices, exchange rates, hedging contracts and declining inventory, plus all the usual uncertainties inherent to investing in public companies.
