Joshua Wu (left) contributed this article to NextInsight
IN MY VIEW, gold should always have a place in one's portfolio and the shiny metal's recent recovery off the lows has investors sitting up and taking notice of it again.
There are several ways to invest in gold.
1) Physical – Probably the easiest and most direct way to invest in gold is through ownership of the metal itself although investors must keep certain considerations in mind such as storage costs and wide bid/ask spreads quoted by gold traders.
2) Gold ETFs – An ETF is a type of mutual fund that tracks gold prices closely and trades on a stock exchange like an ordinary stock. This remains the recommended option for most retail investors
3) Gold stocks – shares of gold mining companies are a risky way to profit from the direction of gold prices and require thorough analysis. Correlation and idiosyncratic risks are also present here as you are subject to changes affecting the specific company and not just the gold industry as a whole.
4) Gold futures & options – the riskiest way to invest in gold, this option is normally not open to retail investors as they have to pass a test or demonstrate sound investment knowledge before being allowed to participate.
As an avid investor in equities, option no. 3 appealed most to me as it allows me to hedge my portfolio exposure -- gold is commonly seen as a safe haven asset when equities are underperforming -- on the same platform and provides leverage. Costs of mining tend to be stable so profits/losses are magnified by changes in gold prices.
• 5 consecutive quarters of profits:At first glance, this might not be something to shout about in the stock market but it is a rarity amongst gold mining companies after bullion prices tumbled 32% from a peak of US$1921.50 on Sep 2011 to its current US$1307.50 level. Most gold companies have been struggling to stay afloat after taking on huge debts to capitalize on the buoyant market then.
• Low all-in cost of gold:By keeping costs low (all-in sustaining costs at US$585 per ounce), CNMC has not only been able to survive but also thrive with an almost unheard of margin of 49% against current gold prices. This margin of safety protects your investment from the downside risks of gold price movements.
• Strong Cash Flow:CNMC has demonstrated strong cash generation capability by generating a positive operating cash flow of US$6.39 million in 1H 2014. The company’s early redemption of a convertible loan in April and its ability to pay dividends is a testament to this.
• Transparency:The company has been reporting its costs in line with the World Gold Council’s non-GAAP reporting disclosures. This breakdown of costs provides greater clarity to investors and enhances the company’s transparency, a point often neglected when investing in stocks.
I recently attended the 2Q results briefing of CNMC, which had reported US$5.5 m in net profit compared to US$0.12 million in 2Q2013. Here are some insights from the Q&A session with CEO Chris Lim.Q1) Your gold production numbers have been consistently growing. Can we expect this to continue?
Chris: Our gold production plans remain on track and are poised to pick up with the increased utilisation of our third leach yard which commenced operation last quarter and has a leaching capacity of 600,000 tonnes of ore per cycle.
Q2) Gold prices have been volatile. Are you worried that gold prices might drop further?
Chris: Gold prices are not within our control but we are not worried as we are currently enjoying an all-in margin of 49%, or US$628 per ounce, against current gold prices (average US$1,277 last quarter) for the gold we produce. We will continue to remain profitable even if gold sinks to US$1000 and, of course, enjoy even greater margins should gold trend upwards.
Q3) You have managed to keep your all-in sustaining costs low at US$585 per ounce which compares favorably with the global average of US$1200. How did you do it?
Chris: The mining location is extremely important. It is for this reason that we chose to conduct our mining activities in Malaysia where the labor costs are relatively low compared to our those of our counterparts operating in Australia and North America, and there is good transport infrastructure. We also obtain our gold via the open pit mining method which is generally less expensive compared to underground mining.
Q4) Can the cost of gold production be reduced further and is there a projected floor?
Chris: It is difficult to predict a floor but we are currently leveraging economies of scale to keep these costs low and are constantly exploring ways to reduce our cost.
Q5) Your sole customer is TCS Trading, a licensed gold buyer in Malaysia. Are there risks associated with this and are there plans to get more customers on board to mitigate these risks, if any?
Chris: We constantly receive calls from refiners from all over the world who want to purchase gold from us. One advantage of being in the gold mining business is that there is no lack of demand for the gold we produce. We settled on TCS Trading due to favorable payment terms and the fact that they are also based in Malaysia means we avoid shipping costs overseas, which again leads to savings for the company.
Q6) What are your plans for the other minerals (zinc, lead and silver) currently available in Manson's Lode ?
Chris: Our current strategy is to increase the reserves and resources for the other base metals. Once it is commercially viable, we will invest in a concentration facility to concentrate the base metals content in the ore and ship these concentrate ores out of Malaysia for processing. We actually shipped ore containing base metals to China for processing in 2012 but the costs of shipping offset our revenue, so we would ideally like to concentrate the ore before shipping to maximise shareholder value.
CNMC's 2Q presentation slides are available here.
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