TOM HUDSON: While gold prices have held up relatively well over the past two months, mining stocks have drilled lower along with the rest of the stock market. That brings us to tonight`s “Word on the Street”: “gold.” Alix Steel is a reporter at thestreet.com, back with us from the NASDAQ.
HUDSON: Alix, nice to see you. Why the divergence going on in gold prices and gold mining stocks? Since May, gold futures are down about 3.5 percent, gold mining stocks down 14.5 percent. What`s going on?
ALIX STEEL, REPORTER, THESTREET.COM: Well, it`s a good question and the biggest answer I have for you is that miners are risky and investors are skittish. And aside from that, there are two other reasons. The first is the introduction of the physically backed ETF since 2004, giving investors a much safer way to buy into the gold market that wasn`t there before.
In addition we`ve seen a lot of companies have to issue shares in order to get cash to fund their project. I spoke to an equity research analyst at Standard & Poor`s who said that between 2001 and 2010 their gold has increased its shares outstanding by 86 percent. That takes a while for it to shake out of shares.
HUDSON: And I want to ask you about Barrick Gold (NYSE: ABX) in a moment, but a couple of other factors to consider with gold miners. You mentioned risk. It comes down to two things, really, cost of production, how much does it cost per ounce to get the gold out of ground, and the location of the mines, because, let`s face it, there is a lot of geopolitical risk in the world.
STEEL: Absolutely. And in terms of cash cost — total cash cost here, about $700 to $1,100 an ounce. Now what that means is that the gold price has to rise much faster in input costs like oil in order for these companies to really make money, expand their profits.
Luckily though oil is down about 20 percent from its highs, and gold is down only 2 percent, so they might get some luck there.
And then in terms of location, you`re absolutely right, they need to find safe places, such as North America and Mexico. There has been a lot of chatter in Peru and Bolivia about the threat of perhaps nationalizing mines or raising taxes on miners. And that would be a big headwind.
HUDSON: We have just one minute left here, and I want to talk about Barrick Gold (NYSE: ABX). It`s the biggest, the oldest of the publicly traded gold miners. You mentioned some of the share overhang that has plagued this stock just really within the past several weeks. What`s the outlook here from the mid-40s?
STEEL: Well, hopefully things will be looking up. I mean, for the year Barrick is down about 16 percent, and since May, about 14 percent. The company is expecting to produce on the top end about 8 million ounces of gold for cash costs under $500.
But it`s not going to have the same kind of leverage, the same kind of juice as a mid-tier miner, and a mid-tier miner being one that is producing but still exploring and growing like, for example, an Eldorado Gold (NYSE: EGO), which is expected to produce under a million ounces of gold, but for cash costs under $400. So it`s really a trade-off, how much risk do you want to take on but how much growth do you really want.
HUDSON: What about disclosures here? Any position yourself in Barrick or Eldorado, Alix?
STEEL: No stocks, just the jewelry, Tom.
HUDSON: Just the jewelry, there you go. Alix Steel. You can read the article at thestreet.com, of course, a link to it on our Web site as well. “Word on the Street,” always great to see you, Alix Steel with thestreet.com.