Why conditions are perfect for making money in the mining business.
The one industry that continues to be a standout in my view is mining. I know it’s an industry that very few people see as exciting, but as a business model, the cash tumbles in when conditions are right—and, you guessed it, conditions are exactly right now.
At this time, the mining industry has almost perfect conditions in which to grow. Precious metal prices have been and should continue to be strong. The stock market is on solid footing, so there’s lots of equity capital around to finance expansion. The cost of cash is also cheap, which is always helpful. And, we have a global economic recovery in mature economies, with continued high growth in large, emerging economies like Brazil, China and India. In my view, global events have somehow conspired to create the perfect environment in which to be in the mining business. It’s no wonder that so many mining companies are overflowing with cash.
What you want in a mining investment is a well-managed company that’s run by known industry veterans. You want a company with the right assets (properties that are producing, along with exploration potential), growing production for the next several years and a rising commodity price environment.
If you have the chance, pull up a list of recent press releases on a company called Yamana Gold Inc. (NYSE/AUY; TSX/YRI). This well-known, established producer just issued an operational update that I would say represents the “perfect world” for a mining business.
The company announced increased gold production in the fourth quarter and a major reduction in cost per ounce. The company previously estimated that its cash costs would be $175.00 per gold equivalent ounce (GEO) in 2010, but now says that this number will be less than $125.00 per GEO. That’s a big deal and should produce a major gain in earnings.
The company also said that it expects 2012 total production to grow about 27% over 2010, to between 1.2 and 1.32 million ounces of gold. In addition, 2013 total production is expected to keep growing to between 1.46 and 1.68 million ounces, and 2014 is targeted at over 1.7 million ounces of gold, representing growth of about 65% over 2010. That’s impressive, and the price of gold doesn’t even have to go up for this company to grow its earnings. It’s the kind of growth you might associate with a high-flying technology stock.
I don’t own Yamana Gold, but it’s a great example of the outstanding business conditions that are now present in the mining industry. It is difficult to get excited about financing big holes in the ground, but this year and next, I think this industry will really pay off.
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