Miners are not gold, and that is the entire point

The miners traded at 98.48 this morning, -0.39% on the session. Every few years someone rediscovers that gold miners underperform gold, declares the sector uninvestable, and moves on. The observation is correct and the conclusion does not follow.

Why miners lag

A miner is a leveraged bet on the metal minus a cost base that has an unfortunate habit of rising with it. Energy, labour and equipment all get more expensive in the same conditions that lift the metal price, and the operational leverage that should work for shareholders gets eaten before it arrives.

That is not a flaw specific to gold mining. It is what happens to any producer whose input costs correlate with its output price.

When the equity is the better instrument

Only in one specific circumstance: when the metal has moved and costs have not followed. That gap is where the leverage actually pays, and it is usually open for a shorter period than people expect.

The things I track for it:

• All-in sustaining costs, reported and guided, across the larger producers
• Diesel and electricity as a share of that cost base, by region
• Labour agreements and where they sit in their cycle
• Capital discipline, meaning whether the response to a good year is dividends or a new mine

The last one is where the sector has historically destroyed the most value. A profitable year has too often funded an unprofitable project.

Where I stand

Long the miners rather than the metal, because costs look to have flattened while the metal has held its gains. That is the configuration where the equity does what it says on the tin.

Owning miners is a bet on management restraint. It has been a bad bet more often than a good one, which is precisely why it pays when it works.

The risk to the view

Input cost inflation reaccelerating, which would close the gap I am relying on without the metal doing anything wrong. I would also turn neutral on any broad move back towards ambitious capital projects, because that is the sector telling you the good years are being spent rather than banked.