In my earlier article, I discussed one of the most important metrics to analyze the silver industry, the actual cost of mining an ounce of silver, which can help an investor figure out whether it is time to buy SLV and/or the silver miners. In that analysis, I used the old 3Q 2012 financials to calculate the combined results of a number of publicly traded silver companies and come up with the average cost it takes to mine each ounce of silver.
In this analysis we will calculate the real costs of production of Alamos Gold (AGI), a smaller miner with fewer than 500,000 annual gold-equivalent ounces produced. The major producing mine is the Mulatos mine in Mexico, and the company is developing two mines in northwest Turkey.
Calculating the True Mining Cost of Gold - Our Methodology
In a previous article about Goldcorp's (GG) cost of production, I gave a thorough picture of the current way mining companies report their cost of production, why it is inaccurate and significantly underestimates costs, and a much more accurate methodology for investors to use to calculate the true costs of methodology. Please refer to that article for the details explaining these issues - it is an important concept for precious metals investors to understand - whether you invest in the miners or just in gold and silver as a commodity.
Real Costs of Production for AGI - 4Q 2012 and FY2012
Now let us use this methodology to take a look at AGI's results and come up with the average cost figures.
Observations for AGI Investors
The first thing that investors should take note of is that the costs to produce an ounce of gold for AGI are $1057 for 2012 and $1172 for 4QFY12, which are not bad compared with other miners. For example, GG had a cost of $1082 and ABX $1277 as the annual total costs of production for 2012 - so AGI's performance is pretty good.
AGI is a miner that is increasing production, so this can be seen in the fact that costs have been lowered from 2011 to 2012 on an annual basis, not because it is cheaper to mine, but because it has increased production by 30% over the period and is benefiting from economies of scale.
One thing investors should note is that the 4Q production costs rose to $1172, which is higher than the yearly average of $1057. This is something to keep an eye on because when 4Q costs are higher than average annual costs, it is a sign that future costs will also be higher than the 2012 annual costs. It is not necessarily a negative because all miners are experiencing rising costs, but something that should be watched and also used to calculate future profitability - I much prefer using the 4Q number to estimate FY13's cost than the annual average of FY12.
For a junior miner, AGI is mining gold at a pretty low cost compared with other industry players. It is a small company with only one producing mine, so investors need to remember this could change significantly if there are any issues with the Mulatos mine, but it is a good sign. Additionally, AGI's attempted bid for Aurizon (AZK) (which was rejected by AZK) is another risk factor that needs to be further analyzed by investors that is outside the scope of this article. But just based on the total gold production costs, AGI looks like a very interesting miner with pretty good profit margins compared with other industry players.
Disclosure: I am long AGIGF.PK.
Additional disclosure: The primary ticker here is AGI (Alamos Gold) but it is not being filled in by the ticker filler. Can you please categorize it under Alamos Gold? Thanks!