Iamgold (NYSE:IAG) is a mid-tier producer with six operating mines (including current joint ventures) in North America, South America, and Africa. Additionally, the company has one of the world's top three Niobium mines, and the company has a world market share of approximately 8% in ferro-niobium which contributes a little under 20% of the company's revenues.
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.
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.
Tax Calculations - Since we are removing Derivative Gains/Losses, Foreign Exchange Gains/Losses, and Write-downs we have to estimate the approximate tax benefit (or loss) based on this removal - otherwise we would be removing a gain/loss but not removing the associated benefit/loss associated with the taxes related to that gain. We use a 30% base tax rate for these calculations, but investors can use whatever tax rate they feel most comfortable with.
For example, if a company reports a $100 million write-down, we will remove $100 million from its total costs (removing the effect of the write-down) and then add $30 million to costs (30% * $100 million) to represent the estimated tax benefit that the company gained from this write-down. You must do this if you want to remove any item from the income statement, otherwise you will be using taxes based on a removed income statement item.
True Costs of Production for IAG Q2FY13
Let us now use this methodology to take a look at IAG's results and come up with their 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 Q2FY13. This results in a Niobium-to-gold ratio of 36.9:1 (assuming a Niobium price of around $40 per kg). Since our conversions change with metal prices, this may influence the total equivalent ounces produced for past quarters - which will make current-to-past quarter comparisons much more relevant.
Important Notes about True All-in Costs Table
IAG changed the way it does its accounting as of Q1FY13 to account for the Sadiola and Yatela mines as joint ventures instead of joint operations. In layman's terms, the company is treating these mines as an equity investment and thus is including only its share of net earnings on its income statement.
This affects true all-in costs in two ways. First, this new method of accounting Removes all revenues and costs associated with these projects, replacing them with only net income. Since we are interested in costs to mine gold, this would throw off the calculation because the costs are no longer included in the statement, thus we also have to treat this production as an equity investment and remove the attributed ounces of these mines from the calculation.
Here is an example to show why we have to remove these attributable ounces from the calculations. If a company produces 100 ounces of gold with a total cost of $500 and revenues of $1500, then its cost per ounce is $5 and its net profit is $10 per ounce or $1000 total ($15 in revenues minus $5 in profits).
If the company now changes its accounting method to account for half of production as an investment, it will remove both revenues and costs from its income statement and only report income from the project. So the company would now report total production of 100 ounces (same as before) with total costs of $250, revenues of $750, and net income of $1000. It would seem that costs are now only $2.50 per ounce - even though absolutely nothing has changed in terms of production costs. The difference is that costs and revenues have not been reported for these mines and only their net income is being added. Thus we have to remove those 50 ounces from our calculations, which will give us our correct $5 per ounce costs.
This is why we are removing Sadiola and Yatela production from our calculated attributable ounces for IAG. We will treat them as IAG treats them, as an equity investment not as an operations segment - this will allow us to get the true cost of each ounce produced rather than skewing the numbers because of an accounting change.
The second consequence of this accounting change is that it has been applied to this quarter but not the previous quarters yet. So ounces produced for previous quarters in our table will still reflect old production (including Sadiola and Yatela) while the 2013 quarters will remove these numbers. Unfortunately, this will make it difficult for gold production comparisons until future income statements are released, but the true all-in costs should be accurate and comparable.
Observations for IAG Investors
The first thing that investors should notice is that IAG's true all-in costs for the quarter were $1338 per gold-equivalent ounce, which is an improvement on the $1392 true all-in costs that company had in Q1FY13. Additionally, it is an improvement on the FY2012 costs of $1405, so the company is steadily showing improvement over its cost structure.
Compared to other gold miners that we've analyzed, IAG's quarter was fairly average, with many competitors such as Barrick Gold (NYSE:ABX) (costs around $1300), Goldcorp (NYSE:GG) (costs over $1250), Yamana Gold (NYSE:AUY) (costs over $1300), Newmont Mining (NYSE:NEM) (costs over $1600), Allied Nevada Gold (costs over $1300), Alamos Gold (NYSE:AGI) (costs under $1250), and Richmont Mines (NYSEMKT:RIC) (costs over $1300) all reporting true all-in costs around the $1300 costs reported by IAG.
Compared to the Q1FY13 numbers (for general comparison purposes only since these are First Quarter numbers), IAG's competitors reported the following costs: Goldfields (NYSE:GFI) (costs over $1500), Randgold (NASDAQ:GOLD) (costs just under $1200), SilverCrest Mines (NYSEMKT:SVLC) (costs below $1100), Kinross Gold (NYSE:KGC) (costs just under $1400), and Agnico-Eagle (NYSE:AEM) (costs around $1400).
Corporate Liquidity - Liquidity is very important for investors to monitor in this current gold environment, especially for producers that have higher true all-in costs and negative earnings. IAG reported a balance sheet of around $447 million of cash, $97 million in gold bullion, and $640 million of long-term debt. Anytime a company has a large amount of debt compared to cash on hand, it is important to understand the debt repayment schedule to make sure that the company will not have any problems meeting the payment schedule. For IAG, it is the following:
Even though the company has a relatively large amount of debt, the repayment schedule should be fairly easy to meet over the next few years, with $89 million a year in payments affordable based on current cash and cash equivalents.
Let us now put together our reserves and true all-in production costs to come up with an approximate valuation for the company based on different gold price levels.
IAG's management has gradually been reducing all-in costs to the mid-$1300 range, which brings them in-line with the average gold miner costs in Q2FY13. Bringing true all-in costs under $1300 would be a significant gain for investors, especially with the company's declaration that low-grade deposits are the future - which requires very efficient processes. In terms of liquidity, the company does carry a significant debt burden but should have no problems paying any of it off over the next few years since cash and bullion reserves are relatively high.
Disclosure: I am long SGOL, GG, AGI, RIC, SVLC, GOLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.