Using discounted future cash flows to determine net asset value, KGC is worth $0 at $1200 gold--but net asset value rises by $2.50/share for each $100 increase in the price of gold. So at $1400 gold KGC is worth $5, and at $2000 gold it is worth $20-which is about where it traded when gold moved up to near $2000.
That analysis is far too simplistic. The primary reason that mining costs rose as much as they did over the last few years (way ahead of average inflation rates) was because of shortages in skilled labor, parts and equipment, as well as rising demand for inputs such as diesel, cyanide, etc. The shortages were caused by the general elevated level of mining activity (not only in precious metals). On top of this miners went after inferior ounces as the price of gold rose.
The flip side of all that is we inevitably will see lower costs going forward as development projects are shelved across the mining industry. That means higher quality ounces will be emphasized. I see Caterpillar just came out with poor results and lower guidance going forward. We can expect to see incentives offered to buy/lease new equipment. I also read recently the government of Tanzania is concerned about losing foreign investment in mining. This type of attitude is likely to become more prevalent in keeping with the usual ebb and flow of governments trying to maximize their cut of mining profits while not discouraging foreign companies enough to send them packing.
While there may be a small portion of the increase in mining costs recently witnessed that are structural, related to the generally declining grades available, I think much of the increase will reverse if we see a prolonged lower gold price environment.
What about their reserves? That's gold in the ground, right? Did you enter the value of that gold, silver, copper, others, in the ground that should be discounted but still has value? I doubt it. Zero at $1200 gold is just dumb. Try more like $10-15/share jsut on the value of their RESERVES.
eyt_trub is saying that if it takes $1,200 to produce one ounce of gold and gold is selling for $1,200 the value of the company is $0. All gold in the ground is virtually worthless if it costs you the exact amount you can sell it for. His argument is correct but, as i've been saying. At $1,200 gold these miners "all in cost" would fall closer to $800-$1,000.
I think KGC said their operating production cost is $740 per ounce. The net difference between this and the "all in cost" is exploration, capex, dividend, etc....
again... I would argue not everything happens in a vacuum. Should Gold fall to $1,200 and KGC continue business as usual... then yes, $0.00 profits. BUT, I just don't see them doing this or why would they? Even if they don't give a damn about their stock price, they still enjoy their cush overpaid jobs.
Many of these miners can run very skinny if they wanted to.