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.
In this analysis we will calculate the real costs of production of Kinross Gold (KGC), a mid-tier producer of gold and silver with operations that span the globe. Kinross has operating mines in North America, South America, West Africa, and Russia.
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, which is an important concept for all precious metals investors to understand.
Explanation of Our Metrics
Cost Per Gold-Equivalent Ounce - is the costs incurred for every payable gold-equivalent ounce. It is Revenues minus Net Income, which will give an investor total costs. We use payable gold and not produced gold, because payable gold is the gold that the miner actually keeps and is more reflective of their production. Miners also use payable gold and not produced gold when calculating their cash costs, so this is pretty standard.
We then add Derivative Gains (or minus Derivative Losses), which will give investors total costs without the effects of derivatives. Finally, we add Foreign Exchange Gains (or minus Foreign Exchange Losses) to remove the effects of foreign exchange on the company's costs.
Cost Per Gold-Equivalent Ounce Excluding Write-downs - is the above-mentioned "Cost per gold-equivalent ounce" minus Property/Investment Write-downs and Asset Sales. This provides investors with a metric that removes exceptional gains or losses due to write-downs and asset sales.
Cost Per Gold-Equivalent Ounce Excluding Write-downs and Adding Smelting and Refining Costs - is the above-mentioned "Cost per gold-equivalent ounce excluding write-downs" adding in smelting, refining and all other necessary pre-revenue costs. This is a new metric that we are now introducing to our true all-in cost series because it will more accurately measure all-in costs and allow comparisons between miners.
Most investors are unaware that many miners will remove smelting, refining, and other costs before reporting their total revenues figures and these pre-revenue costs are not reported in the income statement. The result of this is that it skews all-in costs higher for miners that refine themselves or include the costs in their income statement, while inaccurately showing lower costs for miners that remove it before reporting revenues.
A simple test can be done on any miner to see if there are any pre-revenue costs that are not reported in the income statement. Simply take payable production and multiply it by average realized sales price and this should come relatively close to the total revenues figure. If it gives you a number much higher than reported revenues then there are pre-revenue costs that are not being reported.
This line should alleviate these issues and allow comparisons on a fair basis.
Real Costs of Production for KGC - 1Q13 and FY2012
Let us now use this methodology to take a look at KGC's results and come up with average cost figures. When applying the methodology for the most recent quarter and FY2012, we standardized the equivalent ounce conversion to use the average LBMA price for Q4FY12. This results in a gold-to-silver ratio of 53:1. We like to be precise, but minor changes in these ratios have little impact on the total average price - investors can use whatever ratios they feel most appropriately represent the by-product conversion.
Note on All-in Costs Table
Unfortunately, KGC does not provide a breakdown in a consolidated view of gold and silver production. Because of that we had to estimate gold production based on their gold-equivalent conversion ratio and their provided silver production. We would appreciate it in the future if management would provide a consolidated view into gold ounces (not gold-equivalent ounces) so investors wouldn't have to dig through to find such an important statistic such as gold produced, but unfortunately we do not expect this to change.
Observations for KGC Investors
True Cost Figures - KGC's true all-in costs for Q1FY13 were $1368 per gold ounce, which was a significant improvement on a year-over-year basis (Q4FY12 was exceptional so we will not use that for comparison). Costs were also improved compared to FY2012 annual costs of $1457, that's a positive sign - though we would like to see an additional low cost quarter. The first quarter true all-in costs brings KGC in line with competitors such as Yamana Gold (AUY) (costs just over $1300), Goldcorp (GG) (costs just under $1200), Silvercrest Mines (SVLC) (costs below $1100), Newmont Gold (NEM) (costs around $1300) Agnico-Eagle (AEM) (costs around $1400), and Barrick Gold (ABX) (costs around $1200).
Corporate Liquidity - Liquidity is very important for investors to monitor in this current low-price gold environment, especially with companies that produce gold close to the spot price. With $1.4 billion in cash and cash equivalents on its balance sheet, KGC seems to have adequate liquidity. We do not like the $2 billion in debt accrued on balance sheet, but even with this debt, KGC should be able to make it through with relatively few problems in the current gold environment.
Production Numbers - KGC's gold production was up on a year-over-year basis but down on a sequential basis, but is in-line to match 2012's totals. Silver production continued to drop to 2.1 million ounces in the most recent quarter from both sequential and year-over-year levels.
KGC did a good job bringing down costs from the high costs experienced in 2012 and now its true all-in costs are in line with other gold miners in the mid-$1300 range. But investors should not expect too much in terms of earnings because Kinross' all-in production costs are only slightly below current spot gold prices - which gives little room for profits at current gold prices. Liquidity remains good and management has plenty of cash cushion to withstand the current low gold price environment. Finally, gold production remains flat and KGC is on pace to match 2012 production totals.