Those who say the gold mining sector isn’t even worth looking at are outright wrong. As I see it, in the long run, it’s setting up to provide investors with solid returns.
There are three reasons I believe precious metal mining companies are a great investment for the long-run. First, their balance sheets are getting better. Second, their costs are coming down. And third, they are consolidating.
Mining Sector’s Balance Sheets Improving
Before going into details, let me make one thing clear; when I say balance sheets are improving, I simply mean the companies’ working capital situation is improving, and they are able to go out in the markets and improve their liquidity position.
In 2013, when gold prices plummeted, mining companies were strapped for cash. If you paid attention to their balance sheets, they weren’t looking as strong as they are now. In addition to this, there also weren’t a lot of companies raising money through bought deals—when an entire offering from companies was bought, or when they were able to increase their credit facility.
The situation is very different now. It’s not only the well-known ones; smaller companies are able to get financing as well.
Costs Sliding, Margins Improving
Across the board, precious metal mining companies are focused on reducing their production costs. You see, when the gold prices were rising, they didn’t really have to worry much about rising costs. Now they really have to or their livelihood is at stake.
For examples of how much some companies have been able to cut their production costs, see “Top Three Gold Mining Companies with Long-Term Potential.”
Why does this matter? As costs to produce go down, their profit margins improve. Furthermore, when gold prices increase and they are able to keep their costs in check, it’s essentially a promise to provide massive gains—their profits will be higher and the stock price will reflect this.
Mining Companies Joining Forces
Right now, activity among mining companies is increasing. They are either joining forces to become a better overall miner, or they’re getting rid of their operations which are just an outright cash drain.
Let’s look at some examples. Recently, AuRico Gold Inc. (NYSE/AUQ) and Alamos Gold Inc. (NYSE/AGI) announced that they will be joining their operations to form a new company. By combining their business, they now have better resources, well-diversified projects, and solid management.
On getting rid of non-core assets;Goldcorp Inc. (NYSE/GG) recently announced that it’s selling 26% to Tahoe Resources Inc. (NYSE/TAHO). On this matter, the president and CEO of the company said, “Divesting non-core assets has been instrumental to Goldcorp’s growth and consistently sound financial position, and the sale of the Tahoe position supports that strategy.” (Source: Goldcorp Inc., June 15, 2015.)
What Investors Should Be Watching
At the very least, investors should start paying attention to the mining companies. The decline in gold price was a wake-up call for them, and they have learned a valuable lesson. I will go as far as saying this; mining companies are now in better shape than they were two years ago. Even if the precious metal prices decline further, they will be able to sustain.