If you don’t believe that the gold mining business is floating in cash, all you have to do is take a look at some of the earnings results from the fourth quarter of 2010. Remember, for the vast majority of gold mining companies, the spot price doesn’t have to go up from existing levels in order for the profits to flow. Miners are making money hand over fist with the spot price over $1,000 an ounce.
I think strong gold prices are here to stay for the next several years and that this sector should be a key area of focus for stock market speculators. A lot of these stocks have already done very well, but they should keep doing well as the business model for the entire sector continues to improve.
There are all kinds of gold miners who are generating excellent financial returns in this environment. Consider Eldorado Gold Corporation (NYSE/EGO), whose 2010 fourth-quarter revenues grew to 213 million dollars, up substantially from comparable revenues of 145 million dollars generated in the fourth quarter of 2009. The company sold 149,022 ounces of gold at an average price of $1,373 per ounce, compared to sales of 131,068 ounces at an average price of $1,103 per ounce. Total cash costs for the year were $460.00 per share and fourth-quarter earnings grew to 44.0 million dollars, up from 33.0 million dollars.
Then there’s super large-cap Barrick Gold Corporation (NYSE/ABX), which recently beat the consensus estimate by reporting 2010 fourth-quarter earnings of a record 896 million dollars, or $0.90 per share, compared to earnings of 215 million dollars, or $0.21 per share, representing a 329% gain over the comparable quarter’s diluted earnings per share. Total sales for the fourth quarter grew to $2.95 billion, up solidly from 2009 fourth-quarter sales of $2.36 billion.
A number of other gold companies, both large and small, will soon report their numbers, and it’s fair to say that they will be very strong. The gold business continues to be awash in cash with only a few places in which to put it. It’s increasingly probable that cash dividends to stockholders will increase this year and so will merger and acquisition activity.
If you look at the numbers reported so far by the biggest gold companies, you’ll notice that gold production isn’t going up very much. At Barrick Gold, 2010 fourth-quarter production numbers actually decreased. Practically, this is a very good development for those who are bullish on the spot price of gold. The really big producers are only expecting their gold production to increase marginally over the next few years, despite huge cash hordes available to increase exploration and development. The fact is that there isn’t that much gold in the world, but there is increasing demand. This is why it isn’t unreasonable to expect $2,000 gold in the next 18 months.
Gold, silver and copper should continue to experience solid upward momentum from speculators in the futures prices. Accordingly, gold, silver and copper stocks should continue to tick higher.