Finding Value in Canada’s Beaten-Down Gold Mining Sector

To put it mildly, it’s been a tough year for gold investors and miners alike. Profits in this sector are under extreme pressure given the decline that has occurred in the commodity, and share prices have reacted accordingly, bringing investor sentiment down with them.

The share prices of many companies have touched new lows since the price of gold came crashing back to Earth — and with a number of potential bargains hidden among Canada’s gold mining sector, it’s a good time to survey the industry.

A note on evaluating mining stocks

Investing in gold miners is essentially a leveraged play on the price of gold. For mining equities to outperform bullion, gold mining companies will need to show strong free cash flow generation. To do this, gold miners need to sustain high levels of production, while keeping costs at rock-bottom levels. There are two ways that production costs for gold miners are measured: total cash cost per ounce and all-in sustaining cash cost per ounce produced.

The former is the most popular and widely used measure in the industry, but it only includes direct production costs per ounce of gold produced. The latter has recently been introduced as a more comprehensive means of measuring the cost of production; it measures all costs incurred by a company over the lifecycle of its mines. This measures not only direct production costs but also indirect costs including sales, general and administrative expenses, mine exploration and development expenses, as well as rehabilitation and asset retirement expenses.

Who looks cheap?Of the gold miners that have seen their price plunge, three have managed to sustain solid production while keeping costs at rock-bottom levels, making them an appealing play on gold. They are: the world’s largest gold miner, Barrick Gold (TSX:ABX, NYSE:ABX); relative newcomer to the fray, Yamana Gold (TSX:YRI, NYSE:AUY); and small-cap New Gold (TSX:NGD).

As the chart below illustrates, each of these miners has a total cash cost of under $600 per ounce and an all-in sustaining cost per ounce of under $1,000, making them far lower cost producers than many of their peers.