It ain’t much fun being a miner in these torrid times. It’s raining supply problems, infrastructure problems and energy costs are rocketing. Time for investors to be really picky!

A load of performance tables have just been published. On average the last 12 months has seen tier 1 gold companies shed 20% of their stock market values. And even a safe bet like big boy BHP Billiton has lost 16%.

A warning comes from international consultant Pricewaterhouse Coopers. In its latest mining report it says earnings overall in the sector may have peaked. Revenue for the top 40 companies might have grown 32% last year, but cost rises of 30% are up with that.

Mining houses are having to absorb many of their costs. Net result? The “boom cycle may make way for a bust cycle”, says top South African analyst Gary Quinn. He works at Prudential Portfolio Managers, one of South Africa’s leading investment houses.

Of course, the current, much-publicised supply shortages are a factor in rising prices. But that is not much good to the miners when costs are going through the roof. The inevitable result is lower earnings. Quinn has just published his sums. They show that earnings for South Africa’s miners could be flat through all of 2009.

The gloom is global! Investors have been selling off big time - even the usually acquisitive Russians! Much is being made of the sale by Suleyman Kerimov (35th on Forbes’s rich list) of his stake in Russia’s top silver producer, Polymetal.

Kerimov got out at a 30% premium to the then market price. But traders are reading his move as a clear indication that this sage investor thinks that silver and gold valuations have peaked. And he is not alone.

Unsurprisingly, South African mining shares have been hammered hardest. Boards there are having to deal with a ghastly range of value-destroyers. There are labour issues, safety issues, power issues and the longer term concern that gold yields are declining. These have slumped over 25% since 1999. Miners have had to seek gold at deeper and deeper levels and at a much higher cost.

Take Gold Fields, one of the world’s largest producers of gold. Given the high gold price, now hovering around the $900 mark, one would have thought markets would be moving in this tier 1 producer’s favour. Wrong! In fact Gold Fields’ share price has nearly reached 12 month lows.

Other South African based companies haven’t fared too well, either. AngloGold Ashanti is some 36% off its 12 month high. Harmony, South Africa’s third biggest producer, is down 27%.

Further down the chain, tier 2 producers are more than 30% off the 12 month weighted average. Even an old market favourite — RandGold Resources — has taken a pounding in recent weeks. It has lost a whopping one third of its market value in just three months.

RandGold management says that is down to the fall in gold bullion prices earlier this year. That and — surprise surprise — the cost of energy!

Randgold’s key operations in Mali, Loulo and Morila, depend on diesel power. So, in spite of producing more, Randgold’s profits fell 10% compared to last year’s figures. Management also blames the weak dollar and increased costs of royalty payments.

Total despair? No. We remain optimistic. Along with the likes of resources bank Macquarie, we believe the key is to be selective. We are taking out our calculators to search for low cost producers.

Macquarie has done some of the work for us, highlighting Goldcorp, Agnico-Eagle and Yamana. Goldcorp maintained the lowest costs among senior miners at $240 per ounce of gold. That compared to the overall top gold producers’ average of $385/oz!

So keep looking,

Erin and Isabel

Source: Investing In Gold Miners? Be Selective - And Look at Those Costs!