Not so golden after all

RELATED QUOTES

SymbolPriceChange
NCM.AX10.25+0.130
SLR.AX0.435+0.0150
SBM.AX0.2250.0000

The value of gold has this week pushed higher amidst growing fears over the sovereign debt crisis in Europe, re-sparked by the €10 billion Cyprus bailout and the bank deposit tax imposed over the weekend. Vulpes Investment portfolio manager Grant Williams stated that interest in gold would increase over coming months, with many investors opting to take their money out of shares after the massive recent stock market rally.

The miners who produce the precious metal however, aren’t quite as golden in investor’s eyes. Analyst Mickey Fulp expressed his belief that while gold mining was seen as a growth industry for some time, investors are now starting to realise that it is more an unsustainable value industry.

As such, the increasing value of gold has done little for producers of the yellow metal.

On Wednesday, Australia’s largest gold miner Newcrest Mining Limited (NCM.AX) announced that there would be further delays in project funding, stating that sourcing funding in the capital markets is currently very challenging.

Despite beating expectations, Newcrest’s half year report did little to impress investors with a decrease of 50% in profits. Furthermore, Greg Robinson, the company’s Chief Executive, declared that Newcrest intended on “looking after shareholders” in the future with its cash flow –which was a shattering 78% lower for the half than the corresponding prior period. Newcrest’s shares are currently sitting at $22.50 – 25% below its highs in September.

Similarly, shares in Silver Lake Resources Limited (SLR.AX) and St Barbara Limited (SBM.AX) are sitting well below their October highs, after decreasing their operating cash flow by 70% and 78% respectively. As a result, their share prices are down 45% and 47% since their October highs.

All three of the aforementioned companies decreased their cash flow significantly in the half-period to December 31 which, in turn, means less return to shareholders.

Foolish takeaway

According to The Australian Financial Review, Fulp stated that, in recent years, gold miners “had not cared about their shareholders”. In the eyes of the investor, they have focused far too heavily on production growth and forgotten about their shareholders. Excessively costly production growth and lack of shareholder returns are not often a sign of a sparkling investment.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

Market Data

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