"For gold equity investors, understanding these costs are important because it gives insight into how much the industry spends to produce each ounce of gold versus a specific company. This allows investors to compare a specific company to the industry as a whole and benchmark its performance.
If it costs more to mine a commodity than the market is willing to pay for it, eventually producers will stop producing the commodity and close up shop. This does not mean that the price of gold cannot fall below the cost of production; it means that it would be unsustainable for it to stay there for long periods of time. Thus providing a long-term floor for the price of the commodity.
Publicly traded gold companies offer investors a quick non-GAAP formula to give investors a glimpse at their costs per ounce called "cash costs." This measure may vary slightly from company to company (it is non-GAAP after all) but it is generally their "mining costs" (cost to operate their mines, process the ore, pay miners, etc.) divided by the amount of gold equivalent ounces
produced.
But unfortunately this measure is misleading, and selectively reports some costs and ignores other, which ends up not giving investors a true picture into the cost it takes to produce an ounce of gold.
Some miners have begun to offer a new measure of costs called the "all-in sustaining cash costs''
If it costs more to mine a commodity than the market is willing to pay for it, eventually producers will stop producing the commodity and close up shop. This does not mean that the price of gold cannot fall below the cost of production; it means that it would be unsustainable for it to stay there for long periods of time. Thus providing a long-term floor for the price of the commodity.
Publicly traded gold companies offer investors a quick non-GAAP formula to give investors a glimpse at their costs per ounce called "cash costs." This measure may vary slightly from company to company (it is non-GAAP after all) but it is generally their "mining costs" (cost to operate their mines, process the ore, pay miners, etc.) divided by the amount of gold equivalent ounces
produced.
But unfortunately this measure is misleading, and selectively reports some costs and ignores other, which ends up not giving investors a true picture into the cost it takes to produce an ounce of gold.
Some miners have begun to offer a new measure of costs called the "all-in sustaining cash costs''
Calculating the True Mining Cost of Gold - Our Methodology
To calculate the true costs to mine each ounce of gold, we use the total costs reported for the quarter (revenues minus net income before taxes) and then we add taxes to come up with total costs. Finally, we remove gains/losses on derivatives and gains/losses on extraordinary investments, since these really have nothing to do with running and sustaining the company.
Then we calculate the number of gold-equivalent ounces produced by converting all by-product metals (such as silver, copper, zinc, etc) into gold by dividing the gold price by the price of the by-product. For example, if gold is trading at $1650 and silver $30, then every 55 ounces of silver would convert into one gold-equivalent ounce. We like using the average LBMA cost for the reporting quarter or year. Finally, when doing year-over-year comparisons, we use the same conversion ratio even if the price of the byproduct was different in the different quarter. The reason we do this is because this allows an even comparison when determining the cost of production - we do not want one quarter's jump in copper prices to affect a year-over-year comparison in gold prices.
What are the Industry's Gold Costs?
We have compiled all the numbers for gold companies we analyze for 2011 and 2012. The companies included (with links to their associated detailed calculation pages) are:Barrick Gold (ABX), Goldcorp (GG), Yamana Gold (AUY), Newmont Mining(NEM), Agnico-Eagle (AEM), Eldorado Gold (EGO), Gold Fields (GFI), Allied Nevada Gold (ANV), Randgold (GOLD), Alamos Gold (AGI), Kinross Gold(KGC), and Iamgold (IAG).
The first thing gold investors should note is that the true all-in costs to produce an ounce of gold (excluding write-downs) was $1287 for 2012, which is around a 10% increase in costs over 2011. The true gold cost of $1287 is much higher than the reported "cash costs" (under $1000 for most miners) and gives gold miners very limited profit at current gold prices ($1400 per ounce as of the publishing of this article). This gives investors a much better picture that aligns with gold miner share prices and earnings, which have both been dropping - when considering margin pressures this makes sense.
Gold mining investors should be very cautious about which miners to invest their money in. It will be a very ugly environment for gold miners until the gold price recovers, and some face significant liquidity pressures and we expect mine closures if gold stays below $1400 for very long. Look for miners that have low cost structures and have a lot of cash on their balance sheets, which can help them weather this storm. Avoid miners that have high production cost structures, low cash, and high debt these are the types of companies that will struggle to survive.
GOLD may fall to the $1200's due to aggressive short-term trading, but it is not sustainably produced at these levels. Analysts calling for gold to fall below $1000 per ounce on a longer-term basis simply do not understand the industry and its cost structure. At those levels only a small percentage of gold mining is profitable and many mines would be shuttered and projects cut".
Source Hebba Investments, Seeking Alpha June 17, 2013
