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May 22, 2007

The Main Reason Why Gold Mining Stocks are Underperforming Gold
by Boris Sobolev

As investors are well aware, costs in the mining industry have been rising over the last several years. Here at Resource Stock Guide, we track production costs for several dozen small and mid-tier gold, silver and uranium producers with around 100 operating mines. Quarterly, we analyze cost and margin trends.

Silver and uranium stocks have been good performers over the last 12 months. RSG Silver Benchmark is up over 20%, while Uranium Benchmark is up over 100%; gold stocks, however, have been definite laggards.

We poured through Q1 financials of a large number of gold producers and selected the most representative to summarize our findings.

The list includes 8 companies encompassing 23 mines spread over 12 countries in diverse geographical regions. In our analysis, we used total cash costs per ounce, a common metric used by companies to manage and evaluate operating performance at each mine and widely reported in the gold/silver mining industry as a benchmark for performance measurement.

As seen in the table above, average profit margins based on total cash costs fell from 44.95% in Q4/06 to 42.65% in Q1/07. This is at the same time when gold rose from an average price of $613.5/oz in Q4/06 to an average $650/oz in Q1/07 or 5.96% gain.

Cash costs were negatively impacted by the industry-wide escalations in labor, spare parts and energy costs, due to the processing of lower grade ores and in some cases lower mine production. So, in fact total cash costs per ounce are rising at a faster rate than the gold price. As a result, most gold producers have become less profitable over the past 2 quarters.

This appears to be one of the major reasons why gold stocks have been underperforming the yellow metal.

As paradoxical as it may sound, the best thing that can happen to gold producers is an economic slowdown especially if one remembers the anti-cyclical nature of gold.

As far as silver producers are concerned, their stock prices have been rising despite decreasing profit margins. But the situation there is quite different in terms of investor expectations, which is the subject of our next article.

Boris Sobolev
Denver, Colorado
www.ResourceStockGuide.com

Resource Stock Guide (RSG) provides a free dynamic database for over 120 gold, silver and uranium companies. Stock, metal and currency prices are updated daily; company resources, costs, finances, etc. are updated within 2 to 5 business days after their release. Premium Services including the Newsletter are also available.

Database content includes but is not limited to:

• A broad list of mineral resource stocks representing the most appealing investment opportunities
• The various types of Mineral Resources owned by companies
• Value of In Situ Mineral Resources broken down by category
• Market Valuation of Resources owned by companies
• Geography of mines and projects
• Wide range of Financial Metrics, Proprietary Benchmarks and Metrics
• Company Profiles containing comprehensive data on individual mines, projects, resources, costs, latest news and developments

RSG tools allow our users to sort, group and compare mining companies based on various characteristics. Moreover, these tools help user identify resource companies that are undervalued compared to their peers and have a potential to appreciate in price.

Disclaimer: The above information in this article pertaining to investing, stocks, securities must be understood as information provided and not investment advice. The information provided by Resource Stock Guide is obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. Resource Stock Guide advises all readers to seek advice from a registered professional securities representative before deciding to trade in stocks featured on Resource Stock Guide or any stocks for that matter. All statements and expressions of the companies featured are not meant to be a solicitation or recommendation to buy, sell, or hold securities.

Copyright © 2006-2008 Resource Stock Guide, All rights reserved.

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