Gold Miners Profits Disappoint

August 17, 2009 | By | Reply More

Gold IngotGold miners should be doing well. The price of oil falling back to an average around $60 a barrel from an all time high of $147 in mid 2008 has led to a significant lowering of the cost of production.

During the same period, for six of those months the gold price has been comfortably over $900 an ounce. This column has long been advocating the benefits of investing in gold miners, and, by the by, putting our money where our mouth is.

The fact is that gold miners as a whole have disappointed, and now we know why.  Miners operating outside the United States have suffered from the falling dollar against their local currency when paying their tax bills, licences, habitat restoring costs, local wages etc.

The falling exchange rate has meant that while some miners have turned in record operating margins, their net profit margins have been dramatically reduced because of foreign exchange losses.

The principal, if not the only reason, that the gold market has been so bullish is that there is an expectation that the dollar will continue to lose value. Meaning that on the face of it, however well the gold miners do, their profits are going to be well and truly hit when it comes to paying up for their local commitments – almost a no win situation.

Have a look at Kinross Gold’s second quarter figures where every ounce mined cost only $481, production rose by 38% but their net profit margin was only 3.2% after adjusting for a $57.5 million loss on foreign exchange dealings. Other prominent miners have a similar story to tell.

Now the question is can the miners come up with a solution to this problem, there are some highly talented people in the mining industry used to finding solutions in what is essentially a high risk business environment?

We will be keeping our ears to the ground in the hope that mining companies can find a way round this problem and restore the level of their profits to reflect the price of the metal they produce. US investors deserve no less.

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