Miners quarterly (Q4) earnings will be negatively affected by high energy prices

[swissaustrian]

Some (not all) analysts expect fantastic earnings for pm mining companies. They´re certainly right when it comes to realized pm prices. I´m a little bit worried about input costs for energy, though. Oil has outperformed pms recently. So quarterly earnings for q4 could be a little bit disapointing.
What do you think?

 

[pmbug]

Are input costs rising in a linear function with profits as the metals spot rises? I would be surprised it they were.

 

[swissaustrian]

Are input costs rising in a linear function with profits as the metals spot rises? I would be surprised it they were.

No, they don´t. One usually distinguishes 4 types of input costs:
Labor, Energy, Services, Consumables
here is a short summary on gold mining profitability by the LBMA:
http://www.lbma.org.uk/assets/Alch6001Fellows.pdf
Commodity input costs like energy have a strong correlation to the gold price, though, as it´s not the gold price rising and falling, but rather the value of fiats (USDs) falling (and rising).
See here the gold/oil ratio:

You can see that gold outperformed oil during the last decade, especially after the crash of 2008.
Ron Paul said something great about that during the 2008 republican primary:

During the last two months oil outperformed gold, though. That´s why I think that gold miners will temporarily (!!) suffer from high energy prices.

 

[pmbug]

Good info, but not exactly what I was asking. I may have phrased the question poorly. Is mining output a linear function of energy input? In other words, if you double the oil used, do you get double (linear) or more (non-linear) output? Because if it's not a one to one function, they might not see the dramatic margin compression you are concerned about.

 

[swissaustrian]

Good info, but not exactly what I was asking. I may have phrased the question poorly. Is mining output a linear function of energy input? In other words, if you double the oil used, do you get double (linear) or more (non-linear) output? Because if it's not a one to one function, they might not see the dramatic margin compression you are concerned about.

Ok, sorry I misunderstood.
I really have no info or knowledge on that. Probably depends on the local circumstances to a certain extent. Let´s say you have a low cost mine with easy to access metal on the one hand and another mine deeply underground with relatively difficult access. In the second case energy costs might be a bigger part of the cost structure than in the first case.

 

[pmbug]

Right, that would make sense. The article I highlighted about Australian gold production the other day would indicate that the input costs aren't really a concern right now (at least not down under).

 

[swissaustrian]

Right, that would make sense. The article I highlighted about Australian gold production the other day would indicate that the input costs aren't really a concern right now (at least not down under).

I own some Barrick (ABX) and they regularly complaim about their high energy costs. They don´t brake down how much it effects their operations, though. Maybe it´s just an excuse :shrug:

 

[DSAbug]

ABX is only making excuses for missing. There are better companies out there. If you don't want to do the research, just buy GDX and GDXJ (juniors). The Juniors have had a HUGE consolidation.

here is what Morris Hubbart posted last week

http://www.321gold.com/editorials/sfs/hubbartt112511.html

 

[swissaustrian]

ABX is the cheapest of the big names by price/book and price/earnings. That´s why I own some. Everybody seems to be buying NEM which I own too. But the growth prospects for ABX are better than for NEM, so is the political (nationalization + taxation) risk. The penalty on ABX probably has to do with ABXs past mistakes in hedging.

In terms of Juniors, I own some, but my main positions are in 3 actively managed junior mining funds. They all outperformed the indexes substantially.

Generally speaking, I like direct investments into the metals better than mines. I hold core postions in physical. Additionally I trade futures and (over the counter) options.

My metal (physical, futures, options) to mines (stocks, funds) ratio is about 15:1.

 

[DSAbug]

Well...
The charts show the miners in a stronger technical position on the weekly charts than gold. Gold needs to consolidate and sentiment is so negative on the miners that we should start to see them move up again. It's just a matter of when. While gold might battle it out to get to 2k by the end of january 2012, the GDXJ might be attacking $50.. risk/reward i think is favorable for the miners.

 

[swissaustrian]

Well...
The charts show the miners in a stronger technical position on the weekly charts than gold. Gold needs to consolidate and sentiment is so negative on the miners that we should start to see them move up again. It's just a matter of when. While gold might battle it out to get to 2k by the end of january 2012, the GDXJ might be attacking $50.. risk/reward i think is favorable for the miners.

Sure. I wouldn´t argue about that. Miners look very cheap compared to the metals :agree: After thinking about it for a while, I might buy a call on the gdx.
My 15:1 ratio is more about long term allocation and wealth preservation, though. I´ve worked with it since 2005 and it was always worked well for me.

 

[DSAbug]

Sure. I wouldn´t argue about that. Miners look very cheap compared to the metals :agree: After thinking about it for a while, I might buy a call on the gdx.
My 15:1 ratio is more about long term allocation and wealth preservation, though. I´ve worked with it since 2005 and it was always worked well for me.

It was the right call.. The question is what's the right call TODAY.

IMO.. we are more likely to get a gold bubble prior to the dollar collapsing..

 

[DCFusor]

In the cost list someone forgot CAPEX, which can be a really big deal. You can't use twice the energy without twice the machines (and some other things). In general, I'd say there's a sweet spot, which is why a well run miner (of anything) does better.

 

[DSAbug]

In the cost list someone forgot CAPEX, which can be a really big deal. You can't use twice the energy without twice the machines (and some other things). In general, I'd say there's a sweet spot, which is why a well run miner (of anything) does better.

Well.. right now, miners aren't really selling based on valuations. Much more on sentiment. I've been reading over numbers on the atlas gold mining database and valuations are completely upside down right now.

For example.. There is a mining company out there right now that has a $9 bid on it and is trading at 7.17. Normally, a buyout would be considered a call option for a stock. In the miners, sentiment is so low that they are discounted 20% below the buyout price until the company accepts the buyout. It's insanity.