The price of gold bullion made a large move up following a report in The Wall Street Journal that indicated the Federal Reserve was close to making a move regarding additional monetary stimulus. With this move in gold bullion, naturally many investors started looking for gold mining companies as investments to leverage any move by the Federal Reserve. Of course, monetary policy is just one factor to consider when trying to understand investing in this sector. The move in gold bullion itself is important, but you also have to consider all of the risks and potential rewards for gold mining companies.
The development of a property is extremely crucial to gold mining companies. Exploration work and the complete analysis of what potential gold reserves are held in a property are huge components in the determination of value for gold mining companies.
An interesting name in the gold bullion sector is Harmony Gold Mining Company Limited (NYSE/HMY). For the full year 2011, the firm produced 1.3 million ounces of gold bullion. With operations primarily in South Africa, the firm does have interests in other parts of the world, such as Papua New Guinea. This is one of several gold mining companies to focus on highly profitable mines by shutting down high-cost mines. This focus on producing gold bullion where it’s most profitable is a positive sign that management is focused and aligned with shareholder interests. The company’s stated goal is to produce between 1.8 and two million ounces of gold bullion by 2015.
For the nine months ended March 31, 2012, Harmony Gold reported its net profits at $332 million, up 285% when compared to the same period the previous year. This was primarily due to an increase in price obtained for gold bullion. For the quarter itself, gold bullion production dropped by 18% from the December quarter. According to the company, this was primarily due to safety-related stoppages. There was some production of gold bullion at grades less than expected.
Harmony Gold is excited by its early drilling results for Papua New Guinea. As in many gold mining companies, the results of its exploration work will be important determinants in coming up with its evaluation for future reserves and, ultimately, the stock price. The company states that its prefeasibility study should be available for dissemination in the September quarter.
Chart courtesy of www.StockCharts.com.
While gold bullion did spike, gold mining companies, such as Harmony Gold, moved even higher in percentage terms. Note that the several times the stock has broken the downward resistance line in the past, it moved some distance higher following this occurrence. Of course, no one can predict the length of a move; however, it is apparent that additional funds might step in and support this latest breakout. While the move in gold bullion and related mining companies is reactionary to the Federal Reserve rumors, an actual implementation of additional monetary stimulus would drive even more wind into their sails.