Huge dilution of gold mining stocks

Gold miners have not only borrowed a lot of money over the past fifteen years to expand their mining activities, they have also raised a lot of money from investors through the issuance of new shares. This is according to an analysis of the five largest gold mining companies by SRSRocco.

Whereas the five largest gold producers in the world (Barrick, Newmont, AngloGold, Goldfields and Goldcorp) had a total of 1.39 billion shares outstanding in the year 2000, by the end of 2014 this had increased to 3.65 billion. That's an increase of 2.2 billion shares over a fourteen-year period.

Lower earnings per share

But have the gold mines been able to produce more gold with all that extra equity? The answer to this question is surprisingly no. In 2000, these five gold mining companies collectively produced 23.6 million troy ounces, in 2014 it was only 20.9 million troy ounces.

These figures confirm that it is becoming increasingly difficult and costly for gold mines to extract gold from the ground. If we compare the production of the five largest gold mines with the number of outstanding shares, we also see this trend.

In 2000, there were an average of 59.2 stocks for every troy ounce of gold produced. By 2014, that ratio had risen to 174.7 shares for every troy ounce of gold. You don't have to be an expert to see that the average return in gold per share has been declining for years. This trend, together with the lower Gold price, responsible for the huge drop in the value of gold mining stocks.

More debt...

The five largest gold mining companies have not only issued more shares to finance new projects and acquisitions. They also borrowed billions of dollars in their heyday. Whereas in 2002 the five largest gold mining companies had a total of $7.2 billion in debt on their balance sheets, in 2014 this had risen to $58.5 billion.

Barrick, Newmont, AngloGold, Goldfields and Goldcorp had $305 of debt on their balance sheets for every troy ounce of gold in 2000. In 2014, it was a whopping $2,800 for every troy ounce of gold.

According to SRSRocco, without issuing additional shares and expanding their debt position, gold miners would never have been able to produce as much gold as they do now. From this he draws the conclusion that the gold price is kept artificially low, because without all the extra financial resources, the supply of new gold from the mines would have been much lower.

SRSRocco's analysis tells us that gold mining stocks are not just a lever on the gold price, but that there are also many more risks involved. A dilution of the number of shares can adversely affect your returns. If you are primarily looking for protection of your assets, then physical Buy gold a safer alternative. If you want more risk in your portfolio, you can add gold mining stocks to that. Because when the price of gold rises, the profit margins of the mines increase more than proportionately.