Let's compare two gold producers with similar production profile...

Let's compare two gold producers with similar production profile but different cash cost.

Assume
production OZ/yr: 100k
SP: selling price
CC: CASH COST
LCP: low cost producer
HCP: high cost producer
EBITDA: (SP-CC)*PROD

HCP:
Cash cost/OZ: 900
EBITDA with SP(1100) :(1100-900)*100k = 20mn
EBITDA with SP(1700):(1700-900)*100k = 80mn
EBITDA with SP(2500):(2500-900)*100k = 160mn

LCP:
Cash cost/OZ: 400
EBITDA with SP(1100) :(1100-400)*100k = 70mn
EBITDA with SP(1700):(1700-400)*100k = 130mn
EBITDA with SP(2500):(2500-400)*100k = 210mn

HCP Earning increase with SP(1700): 80/20*100 = 400%
LCP Earning increase with SP(1700): 130/70*100 = 185%

HCP Earning increase with SP(2500): 160/20*100 = 800%
LCP Earning increase with SP(2500): 210/70*100 = 300%

Initially Mcap of a LCP will be significantly higher than a HCP, this difference will start decreasing ie relative outperformance by HCP AS sp starts rising, thus providing a leveraged effect.


lets put this comparision in real scenario,
MML is a LCP with a similar target production of 130k/oz (FY12/CY12) at a cash cost of 250
FML is a HCP with target production of 130k/oz (FY12/CY12) at a cash cost of 850
FML is trading at an MCAP of 200mn, and MML at 1350mn

MML's EBITDA with SP(1750) :(1750-250)*130k = 195 mn
Assuming market prices MML at 10 times EBITDA,
that's 1950 mn MCAP, ie potential of 45% return from current price in FY12/CY12

FML's EBITDA with SP(1750) :(1750-850)*130k = 117 mn
Assuming market prices FML at 6 times EBITDA,
that's 702 mn MCAP, ie potential of 350% return from current price in FY12/CY12

Note: I have estimated FML earnings assuming CRE Take over fails, if it�s successful their target is 200koz with cash cost of 900/oz, also their post takeover MCAP at current price will be 280 mn.

As true with any leveraged product, HCP's is prone to price drops and hence risky,
but hey, even Spiderman has to take risks.



PS: This is just for amusement and not to be taken as advice, please DYOR