Gold mines benefit from high gold prices

Gold miners benefited in the third quarter from a rising gold price and a fall in production costs, according to the World Gold Council. In the third quarter, global production costs came in at $953 per troy ounce, down 2% from the previous quarter. This decline is largely attributable to the return to normal production levels. At the beginning of this year, the gold mining sector still had to deal with lockdown measures, as a result of which it had to (partially) close its production.

In countries such as South Africa, Peru and Mexico, governments took strict measures earlier this year. As a result, global production of gold mines in the second quarter was 10% lower than a year earlier. The gold mining sector also incurred additional costs in May to restart production. In the third quarter, production was back on track, which reduced the production costs per troy ounce. The graph below shows the evolution of the average production costs, expressed as All-in Sustaining Cost (AISC).

Gold mining production costs fell to $953 per troy ounce in third quarter (Source: World Gold Council)

Profit margin in the gold mining sector increases

In the third quarter, the Gold price At an average of $1,912 per troy ounce, about 23% higher than a quarter earlier. In August, the price of the precious metal even rose to a record high. Due to the combination of slightly lower production costs and a much higher yield of the precious metal, the profit margin of the gold mining sector shot up. In the third quarter, there was $959 per troy ounce between gold price and production costs. That was 29% more than the margin in the previous quarter and even 87% more than in the third quarter of last year.

This positive trend is not yet fully reflected in the valuation of gold mining shares. Normally, gold mining stocks act as a kind of leverage on the precious metal, because their profit margin rises much faster with a higher gold price. However, that is not the case this year. The VanEck Vectors Gold Miners ETF (GDX) is up 20% this year, while the VanEck Vectors Junior Gold Miners ETF (GDXJ) is up 21% from the start of the year. This means that the gold mining sector is not doing much better than the precious metal itself, as the gold price has risen by 20.8% this year.

Also Read: Investing in gold or gold mines?

Gross profit margin gold mines has risen sharply (Source: World Gold Council)

This contribution was made from Geotrendlines