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Why not all gold miners are alike Add to ...

It is tempting to dismiss gold producers as a homogeneous group of stocks that merely trade with the price of gold. What a mistake.

Since mid-2005, when concerns arose about the U.S. dollar and the health of the global financial system, the price of gold has risen about 160 per cent in U.S. dollar terms. In Canadian dollar terms, according to information gleaned from Bloomberg, gold has risen 115 per cent.

By comparison, the returns of a half-dozen Canadian gold producers (selected more or less randomly, but they tend to be the better-known names) look less impressive: If you had invested equal amounts of money in Barrick Gold Corp., Goldcorp Inc., Kinross Gold Corp., Iamgold Corp., Yamana Gold Inc. and Gammon Gold Inc., your return since mid-2005 would be 76 per cent - and that is including dividends.

The problem is that the respective returns on these stocks has hardly been uniform, even as gold itself has marched steadily higher. Yamana and Kinross are standouts for their gains of 131 per cent and 135 per cent, respectively.

Meanwhile, Gammon Gold stands out for its 9.8 per cent decline. Yes, even if you had made a prescient bet on gold at the start of the remarkable five-year bull market in the precious metal, you would have nothing to show for your wisdom but a big headache. Rising gold prices are one thing; how much a company has in the ground and the cost at which they can get it out of the ground is another.

On Wednesday, an analyst's downgrade of Gammon only highlighted some of the difference among gold producers. Steven Green, an analyst at TD Newcrest, cut his 12-month price target on Gammon Gold Inc. to $7 from $9 previously, while maintaining a "reduce" recommendation.

His disappointment stems largely from an 18 per cent decline in the miner's gold reserves for its year-end results. "Clearly it was a disappointing 2009 drilling season," the analyst said in a note. "After more than 115,000 metres of drilling at Ocampo [an open pit mine in Mexico]alone, the result was actually a decrease in ounces."

"Also, Gammon's three-year outlook lowered expectations, with 2010 and 2011 production guidance down 24 per cent and 18 per cent respectively and cash cost guidance higher than previous."

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