In an earlier article, we discussed one of the most important metrics to analyze the gold industry, the actual cost of mining an ounce of gold, which can help an investor figure out whether it is time to buy GLD and/or the gold miners. In that analysis, we used the FY2012 financials to calculate the combined results of publicly traded gold companies and come up with a true all-in industry average cost of production to mine each ounce of gold.
First quarter results are starting to come in for gold miners, and investors should look to see if the gold mining industry can be successful in lowering production costs to remain profitable at the current gold price.
In this analysis we will calculate the true costs of production of Newmont Mining Corporation (NEM), one of the largest gold producers in the world. NEM produces gold and copper in seven countries (United States, Australia, Peru, Indonesia, Ghana, New Zealand, and Mexico) and employs around 40,000 employees and contractors.
Calculating the True Mining Cost of Gold - Our Methodology
In the previously mentioned article, we gave a thorough overview of the current way mining companies report their costs of production and why it is inaccurate and significantly underestimates total costs. Then we presented a more accurate methodology for investors to use to calculate the true costs of mining gold or silver. Please refer to that article for the details explaining this methodology, and I would encourage all precious metals investors to understand this concept.
One thing to note is that even though the "all-in sustaining costs" metric provided by some miners is a good step in the right direction of providing investors with an idea of all-in costs, it still leaves a lot to be desired. These reported all-in sustaining figures are not standardized and often differ significantly between miners, with some miners including costs while others leaving them out. That is why we are providing the "true all-in cost figures" which use a standardized approach with every miner, and thus allow investors to use them to compare performance.
True Costs of Production for NEM - 4Q 2012 and FY2012
Let us use this methodology to take a look at NEM's results and come up with the true cost figures for each ounce of NEM's production. When applying our methodology for the most recent quarter and FY2012, we standardized the equivalent ounce conversion to use the average LBMA price for Q4FY12 which results in a copper-to-gold ratio of 480:1 pounds-to-ounces. We like to be precise, but realistically minor changes in these ratios have little impact on the total average price - investors can use whatever ratios they feel most appropriate represent the by-product conversion.
Notes about the True Costs of Production Calculation Table
Before analyzing NEM's true costs of production we wanted to note a few things for investors. In our calculations we use NEM's total consolidated gold and copper production numbers not NEM's total attributable production numbers. The difference between the two numbers is that the consolidated numbers include metal that NEM mines but is payable to "non-controlling interests" and is really not NEM's gold or copper. We then add the income due to these "non-controlling interests" to NEM's total costs to keep our production cost figures accurate otherwise they would significantly understate NEM's total costs.
Observations for NEM Investors
The first thing that investors should notice is that NEM management did a decent job in the first quarter controlling costs on a year-over-year basis, with costs staying pretty much flat. Though on a sequential basis, costs did rise from $1214 (4QFY12) to $1326 for Q1FY13 - which is about a 9% rise. Also, first quarter costs were higher than the 2012 average of $1295, which leads us to believe that 2013 costs will rise from the 2012 total and will be another year of compressed margins if the gold price does not rise significantly from these levels. NEM's costs are also a bit higher than competitor Barrick Gold (ABX), which reported first quarter true all-in costs of $1215 per ounce (though they are expected to rise to $1300 or above for the rest of the year).
On a production basis, NEM disappointed with production falling on a yearly basis by almost 200,000 gold ounces. Additionally, production also fell on a sequential basis by about 60,000 gold ounces. This is probably a result of management efforts to cut costs (or minimize their increases) and is ultimately leading to lower gold production - which is something that we are seeing across the industry.
Investors should note that NEM expects to bring to production a new mine in Ghana (its Akyem project) at the end of 2013, which should provide the company 350,000 to 450,000 gold ounces per year. This is a positive for the company, but investors should remember that NEM also expects grades to continue to fall at existing mines, so total gold production increases from this new mine may be limited.
Finally, in the table above we are using the total production numbers not NEM's attributable production numbers (which are much lower). NEM's attributable gold production was 1,165,000 gold ounces and 38 million pounds of copper. These numbers seem to be on target to meet NEM's FY2013 production forecast of 4.8-5.1 million ounces of gold and 150-170 million pounds of copper.
NEM management kept production increases flat on a year-over-year basis, but still experienced rising costs on a sequential basis. Additionally, this focus on preventing cost increases also resulted in a 200,000 ounce drop in gold production, which is the same result that was reported by ABX earlier in the earnings season. Margins at current gold prices remain relatively slim for NEM (at about 10%) and investors should continue to expect little earnings growth from NEM unless gold prices rise from current levels.
NEM's report is another positive report for gold and GLD investors because it shows that miners are still not able to bring down production costs - even while cutting production. We expect to see falling gold production across the industry (especially if gold prices stay in the $1400 range) and this will mean lower supply even as physical demand is rising. Investors should continue to accumulate gold as its costs of production are rising, while its production is falling.