A quick and dirty look at leverage versus margins.
If you approach it logically, you’d want a producer that produces at the lowest cost, creating high margins and thus nice profits. Profits with a margin for error. Now the rest of the market aint all that stupid either (chuckle) and those high margin producers will be priced as… high margin producers.
Now that we have seen Gold (& Silver) make some good upwards moves in recent weeks, it’s good to have a look again at what that exactly means for the producers:
High margin mines, will make more profits*
Low margin mines, will make BOATLOADS more profits*
(*compared to their previous quarters)
Catches:
- Costs need to remain stable
- The knife cuts both ways, up & down
Example: A company with a AISC of $1250 will have a $350 margin at $1600 gold. If gold prices rise 10%, its margin will rise 47%. Leverage.
While these larger swings make it harder to accurately forecast earnings for the ‘bad students’, for the retailer investor this is an investment angle that can be used to play, short term IMO, the advantages of this leverage.
Optionality plays
Taking it even one step further… you have optionality plays. Those that don’t work at current commodity prices and are tucked away in an obscure closet in a room you forgot about. Some are stuck in the portfolio of majors, some are under maintenance by juniors. These are trading dirt cheap. 16Mil USD for 2B tonnes at 0.3% Copper? 2B tonnes of 0.125% Nickel for 23Mil USD? No problem, TSXV got you covered.
Cheers, Pete
PS: Thanks @Rrooze for sparking the discussion
One Reply to “Commodity Price Leverage”