Further, Cooper says this means that "the market seems to have penalized companies for the rising costs associated with lengthening the life of a mine operation...the market does not seem to be paying for the optionality offered by increasing reserves when they come with increased costs."
The strongest periods of underperformance seem to correspond with times when cost inflation was high. Cooper concluded that "investors seeking gold exposure also want safety in terms of cost containment, and when part of the reason for buying stocks falters, the choice is abandoned for alternative investments."
BofA-ML estimates that the average all-in cost for the industry was up 19% from the previous year to $1,081 an ounce during the first quarter of 2011. The increase is largely due to rising fuel prices, higher labor costs, increased regulatory expenses and declining ore grades.
While it's true that these rising costs are putting a strain on miners' profitability, it's important to keep it in context. While cash costs have increased 19%, profit margins -- the true gauge of a company's value -- have expanded 25% on average, more than offsetting the cost increases.In fact, financials for the majority of gold companies have been improving for years. According to Cooper, many gold companies "have been generating positive