Why Gold Miners?
Major Mining Companies
When investors seek exposure to gold price appreciation, some will purchase shares in major mining companies. These are companies that are producing gold and typically have multiple mines in operation, often throughout the world.
Potential Leverage to the Price of Gold
Major gold producers provide the possibility of upside leverage to the price of gold. For example, if gold is selling at $1000/oz and the cost of production is $700/oz, there is the potential for upside leverage of $300/oz. What makes this scenario appealing is that even if the price of gold were to decline, the possibility for upside leverage still remains.
Increased Demand and Declining Global Mine Production
The challenge faced by major gold producers worldwide is declining mine production and increased demand for gold. During the 90’s, the price of gold was at or below the cost of production. As a result, many major gold producers curtailed their exploration programs. From the beginning phases of exploration, it can take from 7-10 years to bring a new mine into production.
To replenish their depleting mineable reserves, major gold producers are acquiring junior or mid-tier mining companies who have made a sizeable discovery or have recently gone into production. The cost of acquiring and consolidating junior or mid-tier mining companies can limit the upside potential of major gold producers, but it can also reduce their overall risk.
Exposure to Major Gold Producers
A common way for investors to gain exposure to major gold producers is to buy shares in a mutual fund that specializes in gold or precious metals companies. By examining the top 10 or 20 holdings of these kinds of mutual funds, an investor will uncover many of the major mining companies.
Exposure to Individual Companies
Some investors prefer direct exposure to individual companies. Major gold producers typically have larger market caps, and in many cases, can be purchased both from brokers and through online trading accounts. Because of their market caps and share price valuations, major gold producers are often considered to be “mature” stocks and are often viewed as less volatile than their junior mining and exploration counterparts.