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Get Ready for Big Gold Mining Profits in 2011
Written by Sierra Hancock Subject: Gold and Silver
Get Ready for Big Gold Mining Profits in 2011
Matt Badiali
With gold near $1,400 per ounce, major gold producers are going to make a ton of money in 2011.
Some investors will too, but it won't be as easy as you think.
Today, I'm going to show you which gold miner we must own in 2011. But before I get there, let me back up...
Gold prices are up, which is great for gold miners. But their costs are up, too.
To keep it simple, we can think of a gold miner's earnings as the
amount it gets from selling gold, minus the amount it has to spend on
the electricity, concrete, steel, and diesel fuel it needs to get the
gold out of the ground.
The prices of electricity, concrete, steel, and diesel fuel are
high and rising. The last time we saw these levels was in 2008. Take
diesel fuel, for example. This is a major cost for gold miners. It runs
everything from the excavators to the dump trucks.
In 2008, the average price of a gallon of diesel fuel was $3.80.
Right now, it's $3.31 – and we're likely to see it climb over the next
few months at least. So using the 2008 price is a reasonable assumption.
Below, you'll find a table of three of the biggest and best gold
miners. I compared estimated 2010 earnings with what they'll make in
2011 if gold stays at $1,400 per ounce and costs are similar to 2008.
Take a look...
|
Gold
producer |
Estimated
2010 earnings |
Estimated
2011 earnings |
Percent change |
|
Goldcorp |
$1.4 billion |
$2.5 billion |
+86% |
|
Newmont |
$1.7 billion |
$2.0 billion |
+20% |
|
Barrick |
$2.8 billion |
$4.0 billion |
+42% |
|
Data from Bloomberg | |||
As you can see, there is one clear winner. Goldcorp's net earnings
will rise 86% from 2010's estimated net earnings. Barrick Gold's net
will rise 42% in that scenario, while Newmont's nudges up 20%.
It turns out, Goldcorp is the cheapest among the three as well.
Here's another table, which shows you how much you're paying based
on last year's earnings... and how much you're paying based on my
estimate of their 2011 earnings...
|
Gold
producer |
P/E based on
est. 2010 earnings |
P/E based on
est. 2011 earnings |
|
Goldcorp |
24.2 |
13.0 |
|
Newmont |
18.6 |
15.5 |
|
Barrick |
19.4 |
13.7 |
At more than 24 times last year's earnings, Goldcorp may look expensive. But using my numbers for 2011, it's a great deal.
There's no guarantee gold will remain at $1,400. It could sink to
$1,200. It could skyrocket to $1,800. But the big, long-term trend here
is up... and if it continues, big gold miners are going to start rolling
in profits. And the best deal in "big gold" is Goldcorp.
Good investing,
Further Reading:
Commodities are climbing across the board, which is
turning into big gains for the share prices of commodity stocks. "But
we'd be foolish to focus only on the potential gains," Matt cautions.
"We need to acknowledge that things could get crazy... but we still need
to manage our risk." Pick up some tips here: The Key to Investing in Commodities in 2011.
There is a potential bomb hidden in the energy sector. But Matt has
discovered an early warning system. Don't miss his essay here: If You're an Energy Investor, You Must Watch These Stocks.
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