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Case for investing in gold mining producers tested

A refiner pours bars of gold at Agnico-Eagle's Meadowbank Mine facility in Meadowbank Mine, Nunavut on Wednesday, August 24, 2011.

Sean Kilpatrick/THE CANADIAN PRESS

Miners are benefiting from record prices for gold, but many have suffered setbacks that threaten to harm the case for investing in producers over physical gold.

Rising production and capital costs will be one of the biggest drains on profits for major miners such as Barrick Gold Corp., Goldcorp Inc. and Newmont Mining Corp. when they report earnings this week for the July-September period, a quarter in which gold hit a record above $1,900 (US) an ounce.

Agnico-Eagle Mines Ltd. indefinitely halted operation at its Goldex mine in Quebec last week due to structural failures that posed a safety risk for its crews. The result is a writeoff in the third quarter of about $170-million, or $1 a share.

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Barrick, the world's largest gold producer, closed its controversial $7.3-billion purchase of copper producer Equinox Minerals Ltd. in mid-July, doubling its copper content, and has since seen the price of the base metal plunge 30 per cent as part of the recent commodities correction.

Investors will be anxious to see results from Goldcorp, which reduced its production guidance in July following ramp up issues at its Penasquito mine in Mexico and forest fires that impacted operations at Musselwhite in northern Ontario.

Investors are quick to punish bullion producers for flaws in their operations, even as the price of gold remains strong. Gold company stocks have lagged the gold price in recent years as more investors turn to investments backed by physical gold, such as exchange-traded funds.

Some investors see buying bullion as a better investment over shares of producers, which can carry more risks ranging from operational problems to geopolitical issues. That is on top of the everyday risk the price of gold will see a sharp drop, which is a problem for all investors.

It has been a particular worry in recent weeks with gold slipping 15 per cent to about $1,630 an ounce on Friday, down from a record $1,923.70 reached in early September.

Still, gold prices were up 13 per cent in the third quarter, compared to the previous quarter, which is expected to result in an earnings boost of about 8 per cent across the industry, according to UBS Securities analysts Brian MacArthur and Dan Rollins.

"With a strong commodity performance in Q3/11, emphasis will be placed on execution and cost control," the analysts wrote in a recent note.

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Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More

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