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  • Writer's pictureIshfaaq Peerally


The selloff of $DGE.L continues while investors worry about $FB with fears about the launch an antitrust probe. Lower $OIL prices send $CXO and $PE down too. Good news for today are mainly in financial stocks $JPM and $GS are about 0.25% up while $ALV.DE and $TRV are respectively 0.4% and 0.75% up.


Gold $GOLD $GLD prices have been increasing this year for multiple reasons: The trade war, uncertainties about Brexit, negative interest rates in Europe and Japan, aging bull market. There is a lot of volatility going on and, therefore, investors buy gold. Buying gold is good but what is better is buying the right gold miner. You don't have to invest in a gold mining ETF such as $GDX or $GDXJ , it is better to look at the companies individually.

To understand gold miners, you need to understand gold. Gold is a hedge and it is not a value producing asset. Stocks grow because the intrinsic value of the companies grow. That's why the $SPX500 has outperformed gold by a very large margin over the long-term. The only reason people by gold is because they have been buying gold for more than 5000 years. It is not the most expensive or rarest metal. This makes it perfect to be used as money. It is rare, but not so rare. It is nonreactive and mostly useless. You can't make any tools with gold. Silver $SILVER is the best electrical conductor and is used in electric circuits. Therefore, there is a market affecting its price. There is a demand and supply curve that we can study. If you are investing in a Lithium mining company, you should look at the current demand for Lithium. Tesla $TSLA makes their batteries from Lithium. Most of our batteries are made from Lithium. The price of the commodity is going to be determined by the demand and supply. But for gold, the only thing driving the price is that it is a hedge.

The most important thing to look at in a gold miner is the AISC (All-in sustaining cost). This is the minimum price gold needs to be for the company to make money. The lower this number, the better. For Barrick Gold $GOLD. the AISC is around $900. The margin between the price of gold ($1500) and the AISC ($900) is the free cash flow per once ($600). To calculate the total free cash flow of the company, you just multiply that number by the total production. If you are looking for gold mining stocks with a low AISC, you should look at African mines. But be careful. It is not always safe to invest in a country such as the Democratic Republic of Congo. You should always look at each mine and their individual AISC. Australians and Canadians mine can have AISC of over $1200 because of higher labor cost and also of the respective weakening of the $AUDUSD and strengthening of the $USDCAD . For example, Newmont $NEM has a Canadian mine called Red Lake with an AISC of $1340.

You need to know how much of their productions is in gold. If a company is mining 80% gold and 20% copper $COPPER , you will need to understand the copper market before making an investment. But if more than 95% of their revenues come from just gold, it is less important. How much proved reserves do they have? You don't want to invest in a company which will run out of gold in 5 years.

Gold miners tend to take debt to build mines, so make sure they don't have much debt. The current ratio will give you a good indication of how much liquidity they have in case of a sudden massive drop in gold prices. Also, look at hedges. These companies take hedges to protect them against $OIL prices, currency fluctuations and even $GOLD prices. In 2009, gold prices were rising but Barrick Gold lost money because of bad hedges.

To find the right price for the company, use the discounted free cash flow method. Try with different scenarios with different gold prices in different years to see how these companies are going to do then.

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