The Gold Mining Business Model’s the Best There Is for Any Industry
The economic news out there still isn’t great, but the stock market doesn’t seem to care. Equity investors seem only worried about first-quarter earnings and the outlook for the numbers remains very bright.
Also looking good in this market are precious metal stocks, as spot prices remain very strong. This is a sector that needs rising spot prices for stocks to keep advancing, but the money continues to tumble in if you’re a gold producer. In fact, the business model is so good that most growing producers don’t know what to do with all their excess cash (what a great problem to have!).
As an example of the kind of profitability you can find in the precious metal sector, Avion Gold Corporation (TSX/AVR) is but one junior mining company that’s cashing in due to strong gold prices.
Avion Gold is a junior Canadian gold miner with exploration and production facilities in West Africa. The company holds 80% of the Tabakoto and Segala gold projects in Mali. Avion Gold announced strong earnings of 18.63 million dollars ($0.05 per basic and diluted share) for the three months ended December 31, 2010. This compares to net income of 3.97 million dollars, or $0.02 per diluted share, generated in the same quarter last year.
According to the company, it sold 27,908 ounces of gold at an average realized price of $1,370 per ounce, which represents a 10% increase over the average realized selling price of $1,234 per ounce in the previous quarter. Gold revenues were 38.2 million dollars, compared to 14.2 million dollars in the comparable quarter of 2009.
Where I’m from, a business that sells 38 million dollars’ worth of goods and generates over 18 million dollars in profits on those goods is really doing something right. Avion Gold produced 26,090 ounces of gold in the fourth quarter of 2010 at a total cash cost of $520.00 per ounce. For all of 2010, the company generated record earnings of 31.5 million dollars, or $0.09 per share, compared to 2.6 million dollars, or $0.01 per share, in the prior year. Total revenues were 115.3 million dollars compared to 33.6 million dollars in 2009 and total production grew to 87,631 ounces of gold. This year, Avion Gold expects to produce about 100,000 ounces of gold and the company is still predicting production of 200,000 ounces a year in 2012.
This gold stock is just one in a large universe of junior mining companies that are making money hand over fist with gold prices over $1,000 an ounce. It’s a great business model and it’s likely to stay that way for a considerable period of time.
Investing in gold has always been a risky business, because you can’t control how much gold is in the ground and what’s going to happen to the price of the commodity on the open market. All you can do as an investor is play the market as it is. In my mind, however, it’s no different than investing in a technology company. The risks are the same and so is the unknown.