Gold Companies Still Face Cost Squeeze

The vaunted leverage of gold producers to gold hasn't worked out very well this decade, and rising costs are to blame. This year, gold producers have seen a satisfying surge in profits but the stock prices haven't surged along with their earnings. Alix Steel explains why in this report for the Street.com, in which she discloses that most producer CEOs are still facing about cost squeezes.

The chief executive officers of major gold mining operations have gathered here this week for the BMO Capital Markets 20th Global Metals & Mining conference. Many will be taking time out of the conference to meet with TheStreet to discuss the headwinds their companies are facing this year, which include rising raw material costs, higher labor pay, escalating taxes and exchange rate problems.

Many of these executives have recently reported strong fourth-quarter earnings results that were largely fueled by gold prices hitting a record 2010 intra-day high of $1,432.50 an ounce. While good news for investors, the dominant theme that emerged from those results centered around the rising battle between higher revenues and steeper input costs. In fact, Barrick Gold and Goldcorp seem to be among the few exceptions that have minimal exposure to the issue.

She ends her article with these useful words for any prospective gold-stock investor:

For an investor wanting to buy gold stocks , it can be a risky endeavor. The nuts and bolts of traditional financial results like earnings per share are less important than in other sectors. Instead, it's best to focus on how much gold the company has in the ground, how much it will produce, for how long and at what costs. We'll put these questions to the CEOs to determine the winners and losers of 2011. Stay tuned.

I once did a long-term number crunch on how much beta (leverage) the Amex Gold BUGS Index had to gold itself. The figure I got was about 1.67. Interestingly, the BUGS has next to no alpha: there was no risk-adjusted benefit to investing in gold stocks vis-a-vis gold itself. That lack of alpha, along with the greater number of uncertainties that come with investing in gold miners, may explain why most hedge funds have tended to go with bulllion.