Monday, June 25, 2012

BUY CGR @ $0.63 -- Miner Cost per Ounce Study

As if I do not already own enough shares of Claude Resources Inc (CGR), I bought 20,000 more at $0.63 earlier this morning. I am not one of those guys who thinks in terms of 'averaging into a position'. I bought more because I could not find anything that offered more value and potential upside.

After a couple charts of today's CGR buy I have charts of 3 other gold miners I'd like to show you for the very specific purpose of comparing share price movement with the miner's cost per ounce of gold production.

But for now, let's take a look at the first CGR chart. 

Click on any chart to ENLARGE

This 4 hour chart primarily had one thing going for it and that was the reading on 'NewStudy14' of 99.9437. Secondarily, the Demand Index fast stochastic (5,3) had bottomed and was  on the rise. 

This second chart of CGR - a 2 hour chart - is interesting in that I have detailed the numerous positive divergence True Strength Index (TSI) indicator BUY signals that have appeared over the past 6 or so weeks. 

CGR has been hovering above 62 cents for weeks now, despite the volatility we have seen in gold. I am hoping this means the stock price has reached the bottom floor and all that will be required of me is.......patience. 

As promised I'd like to show you a few mining stock charts. But first I want to remind readers that though an ounce of gold sells for a certain price on a certain day for any and all who wish to purchase it, the cost to produce that single ounce of gold varies widely throughout the mining industry. Each company has to find the gold it will sell at the lowest possible cost to be a profitable company. 

And this means that each company has a unique situation and a unique cost to produce an ounce of gold. Some companies, like the first two we will look at, have comparatively low costs. There are lots of favorable implications for the viability of such mining companies, but the primary characteristic I'd like to focus on from a potential shareholder's point of view is risk.

If gold is trading at $1900 or $1550, but the companies cost to produce an ounce of gold is, say, $500, there is a relatively small risk that the company will be able to show a profit at the next quarterly earnings report. Yes, the amount of profit per share varies with the price of gold - in this case there is a potential profit margin of $1400 per ounce of gold mined to something just over $1000 per ounce. That is a 40% difference in earnings power, but not a deal breaker for the mining company.

This is a daily chart of Barrick Gold Corp (ABX). 

Barrick's (ABX) cost to produce an ounce of gold is $500 and we see on the chart that its stock share price has had a range of 37.8% in the past year. That percentage price swing is very similar to the profit margin discussion I offered in the previous paragraph.

This is GoldCorp Inc (GG) on a daily chart. 

GoldCorp (GG) has a cost to produce an ounce of gold somewhere in the neighborhood of $534. And we note that it traded in a 42.9% range.

Let's stop for a moment and think about how these stocks are likely to be priced when gold returns to $1900.

That's right - a good guess is that they would go back to the price of their highs on these charts. And those would be great gains for any investor!

But what about the miner who cannot produce an ounce of gold for $500 and sell it for whatever the market will bear? How did they fare in gold's $350 downward range? 

Here's an example. This is Golden Star Resources (GSS). 

GSS spends $1202 to produce a single ounce of gold. When gold was selling at $1900, GSS had a gross profit of $700 per ounce. But with gold selling at $1550, the profit margin narrows to just $350 per ounce. That fluctuation in the price of gold had a huge impact on this company's bottom line. Indeed, the two extreme profit margins were 100% apart, not 40% as with the first two companies we looked at.

And GSS share price, oh my, close your eyes please..... a range spanning 71.2% to the downside. OUCH!

Last chart. I promise.

If you knew me personally very well, you knew this chart was coming last. Hey, what can I say?

You know, when I bought a slug of CGR for my retirement account last winter and payed $1.44 a share, I had not thought about this stuff - miner cost per ounce. 

But I have now. :-)

Anyway, I learned a valuable lesson and I hope my writing this article helps someone else, as well.

Whoa... CGR closed at $0.645 I see. I think it's great to be on summer vacation again.



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