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Gold Miner Performance: A Look Miner Cost Inputs vs. Gold Price



January 07, 2010 – Comments (10)

I put this post up during the week after Christmas, and it didn't get much reception. That could either be because 1) poor timing since most everybody was out (maybe) or 2) it is considered to be of little value and was commensurately ignored (much more likely).

Here it is again on the off chance it is reason 1.


Many of us who are bullish on gold and gold miners often talk about the Gold / Oil Ratio (GOR). The reason why this is of interest is that metal mining is a very energy intensive endeavor and the price of oil is the biggest cost input for GSMs. But just because the price of oil is high or low does not determine profitability. If the price of oil is high but the price of gold is higher (on a relative basis) then miners can still be profitable.

In order to determine profitability for a gold miner, as an individual company, you must look at the "All-In" Extraction costs: Energy inputs (are they hedged or not, what is the value of the energy hedges), ore grades in the mines, metal by-products, environmental costs, mine types and ore transportation, etc, all vs the price of gold (do they have gold hedges in place? What are some likely targets for gold prices?).

But stepping back and looking at the big picture, I want to show the impact of the biggest factor (energy prices) and how the Gold / Oil Ratio and the price of Gold affect the performance of Gold Miners as a sector. I will be using the HUI for this study since the HUI is a basket of unhedged (no gold hedges) GSMs.


Since 2000 gold has been in a strong bull market. The HUI has also been in a strong bull market, but has seen a lot more "stair-stepping" in its performance. And you can see from the chart above, that its consolidation periods coincide with unfavorable trends in the Gold / Oil Ratio.

If you are bullish on Gold and you are bullish on Gold Miners, the question you need to ask yourself is: Will Gold outperform Oil in the future (near term and long term) and during the next phase of the credit crisis (assuming we have one)?

My own opinion is that: Yes, I think the price of Oil will rise. Yes, I think the price of Gold will rise. Yes, I think Gold will Outperform Oil. Yes, I think there will be another phase of the credit crisis. Yes, I think the correlation between the HUI and the stock market as a whole will diverge, as the HUI will represent a sector whose bottom lines are increasing and the SPX (for example) will not.

But I am not trying to convince you of this. I am simply showing you a useful evaluation tool at the macro level, so that you can make sense of the behavior of a very important equity sector. The conclusions you reach for yourself are up to you.

10 Comments – Post Your Own

#1) On January 07, 2010 at 6:47 PM, FleaBagger (27.52) wrote:

If they're minor cost inputs, what's the big deal?

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#2) On January 07, 2010 at 6:59 PM, topsecret09 (87.88) wrote:

Pitch by: topsecret09 12/23/09 11:03 AMReply I have to give props to Portfeuille on this one. He brought It to my attention a coulple of days ago,and after a little research,I have to agree with him on this one. I did some simple calculations using their estimated gold reserves (only) that are In the ground. A conservative estimate of their stock price using 34 million ounces of gold as a data point would be about $2000 per share !!!!!!! I am not even factoring In their 8.5 BILLION LBS of copper !!!!! This one looks like a great addition to anyones portfolio with a long term view. Nice Inflation hedge In a shaky market..... TS CORPORATE STRATEGY
Seabridge Gold was founded in 1999 at the bottom of the gold market. At that time, it took 44 ounces of gold to buy one unit of the DOW Jones Industrial Average, an all time high for the stock market in terms of gold. It was our view that financial assets, especially equities, were in a bubble, that gold would eventually outperform equities and other assets, and that the gold price would eventually exceed its 1980 high of US$852.
Our goal in establishing Seabridge was to provide exceptional returns to shareholders by maximizing leverage to the gold price in what we perceived would be a rising gold price environment. Our strategy was to optimize gold ownership per common share by increasing gold resources more rapidly than shares outstanding. This ratio of gold ownership per common share provided a simple but effective measure for evaluating dollars spent...are proposed expenditures likely to increase this ratio or not?
We decided that our competitive advantage at Seabridge would be to find, evaluate, acquire, explore and develop gold deposits. From our inception, we determined that Seabridge would not build or operate mines...we would look to partner or sell assets which were ready for production. Building mines adds considerable technical and financial risks and requires a different set of skills and resources. One of the most significant risks involved is unanticipated shareholder dilution which reduces gold ownership per common share. We therefore narrowed our value-added proposition to three phases which would unfold as the gold price rose...acquiring deposits, expanding them and defining their economic parameters. In our view, this was a relatively lower risk and less capital-intensive strategy consistent with the goal of optimizing gold ownership per common share.
In effect, Seabridge was conceived as a gold-in-the-ground ETF with the value-enhancing potential to expand gold ownership and upgrade the quality of gold resources without equivalent equity dilution, unlike above-ground gold ETFs.
In 1999, it was cheaper to buy ounces in the ground than to explore for them. We therefore set out to buy gold deposits in North America that were not economic in a low gold price environment. Hundreds of projects were for sale at distressed prices as producers struggled to stay in business. Seabridge chose projects with three main characteristics:

1.Proven resources with quality work done by reputable companies;
2.Upside exploration potential; and
3.Low holding costs to conserve cash in the event that a higher gold price was delayed.
From 1999 to 2002, Seabridge acquired 14 million ounces of gold resources in eight different North American deposits at less than US$1.00 per ounce and holding costs of less than 10 cents per ounce per year.

By 2002, with the gold price on the rise, it was becoming more expensive to acquire existing resources and the cost-benefit equation tilted in favour of exploration. Seabridge's strategy entered its second phase which was to expand its resource base by carefully targeted exploration. This phase proved highly measured and indicated gold resources grew 381% over five years while shares outstanding increased only 35.4% during the same period.

By 2008, it was clear that the gold price had risen sufficiently to make a number of Seabridge's projects potentially economic. Work therefore began on the third phase of Seabridge's strategy...defining the economics of its projects through engineering studies and upgrading resources to reserves. This effort focused on the giant KSM project which, during the exploration phase, had emerged as the Company's most important asset. Work now in progress will lead to a completed preliminary feasibility study for the KSM project in early 2010, converting a large portion of KSM's gold and copper resources to reserve status and enhancing their value. A similar program is being planned for Courageous Lake, Seabridge's second-largest asset. Work on KSM and Courageous Lake is being funded by the sale of non-core assets which is consistent with the strategy of limiting share dilution and enhancing shareholder value.      Reply: portefeuille7 12/28/09 3:55 PMReply A conservative estimate of their stock price using 34 million ounces of gold as a data point would be about $2000 per share
That would be a not so conservative estimate of the value of their gold reserves, not the stock price.
Fully Diluted Number of Shares 38,801,185 ( )
Even if you add measured, indicated and inferred you get a little over $1000 in gold reserves per share at the current spot price of gold.
                                              Oh my !!!      TS

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#3) On January 07, 2010 at 7:33 PM, portefeuille (98.91) wrote:

in case you are confused what comment #2 above means. it is copied from here.

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#4) On January 07, 2010 at 7:48 PM, NOTvuffett (< 20) wrote:

porte,  I saw a thing on the theory of 'peak gold' a couple days ago, and it was much more beleivable that the peak oil nitwits.  And as a bonus the person making the argument was looking for $1600 gold in a year.  Much more plausible.


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#5) On January 07, 2010 at 7:51 PM, topsecret09 (87.88) wrote:

#3) On January 07, 2010 at 7:33 PM, portefeuille (99.98) wrote:in case you are confused what comment #2 above means. it is copied from here.       Thanks Port !......   TS

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#6) On January 07, 2010 at 7:53 PM, NOTvuffett (< 20) wrote:

People talk about the historical price relationship between one commodity and another, does this have any real meaning?

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#7) On January 07, 2010 at 8:31 PM, 100ozRound (28.51) wrote:

Nice post Binve...

Anyone seen speedybure lately??? He must be busy with school...

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#8) On January 07, 2010 at 8:50 PM, binve (< 20) wrote:

FleaBagger, yuk yuk

topsecret09, thanks.


People talk about the historical price relationship between one commodity and another, does this have any real meaning?



Thanks man! No, I haven't seen speedy around, but I wouldn't be surprised with the quarter starting..

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#9) On January 07, 2010 at 9:01 PM, NOTvuffett (< 20) wrote:

binve, I do believe the relationship between silver and gold is wrong.  I tried to buy one of the lesser known names in the silver market because I thought it may have more room to move than better known names (PAAS).



















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#10) On January 08, 2010 at 1:51 AM, FleaBagger (27.52) wrote:

Sorry, I couldn't resist. Besides, isn't some charity getting money for all my nonsense?

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