In our complete Q2FY13 cost analysis, we went over a number of the industry's all-in costs to mine an ounce of gold in Q2FY13 and 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 Q2FY13 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 true costs of production of Barrick Gold (ABX), one of the largest gold producers in the world. ABX produces gold and copper in four continents (North America, South America, Australia, and Africa) and is an important indicator of mining production and costs since it is the largest gold producer in the world.
Explanation of Our Metrics
For a detailed explanation of the metrics and each metric's strengths and weaknesses please check out our Q2FY13 full quarterly all-in costs gold report where we discuss them in detail.
All Costs per Gold-Equivalent Ounce - These are the total costs incurred for every payable gold-equivalent ounce, which includes everything. This is the broadest measure of costs, and since it includes write-downs, it is essentially the "accounting cost" of producing gold-equivalent ounces.
Costs Per Gold-Equivalent Ounce Excluding Write-downs and S&R - This is the cost to produce each gold-equivalent ounce when subtracting write-downs and smelting and refining costs, but including everything else.
Costs Per Gold-Equivalent Ounce Excluding Write-downs - This is similar to the above-mentioned "Costs per Gold-Equivalent Ounce Excluding Write-downs and S&R" but includes smelting and refining costs. That makes this measure one of the best ways to estimate the true costs to produce each ounce of gold, since it has everything (including taxes) except for write-downs.
Costs per Gold-Equivalent Ounce Excluding Write-downs & Taxes - This measure includes all costs related to gold-equivalent production excluding all write-downs and taxes. Essentially this is the bottom dollar costs of production with an artificial 0% tax rate (obviously unsustainable) which works well because it removes any estimates of taxation due to write-downs or seasonal fluctuations in tax rates, which can be significant. The negative to this particular measure is that since it does not include taxes, it will underestimate the true costs of production.
True Costs of Production for ABX
Let us use this methodology to take a look at the company's results and come up with the true cost figures for each ounce of production. When applying our methodology, we standardized the equivalent ounce conversion to use the average LBMA price for Q3FY13, which results in a copper-to-gold ratio of 413:1. 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.
Notes about Barrick's All-In Costs
Investors should note that ABX reported all-in costs for Q3F13 of $1204 per gold-equivalent ounce, which is between our two primary all-in costs figures of $1033.49 (removing taxes and write-downs) and $1378.21 (including taxes). The difference is due to a number of factors including inclusion of royalties in ABX's number, the use of gold sales versus gold production, exclusion of depreciation, different byproduct to gold-equivalent conversion rates, and a few other factors.
We believe our numbers are more transparent and give investors the flexibility to analyze different cost numbers and do industry-wide comparisons. So even though we think ABX's all-in cost number offers value, our cost numbers are much more valuable for comparison purposes across the industry because they standardize the calculations based on income statement costs. For example, it makes it easier to compare ABX's costs with Goldcorp (GG) or Agnico-Eagle's (AEM) costs because it can be done by using only the GAAP income statement items to arrive at the different cost types.
This is even recognized by Barrick on page 44 of its quarterly filing:
These measures are not equivalent to operating profit or cash flow from operations as determined under IFRS. Although the WGC has published a standardized definition, other companies may calculate these measures differently.
So investors need to be careful when comparing all-in costs and all-in sustaining costs (AISC) that are reported by the miners - they are not necessarily comparable between companies and since they rely on sales and not production they can vary quite a bit.
Observations for ABX Investors
We will not cover the major events that occurred when the company reported their third quarter results and will focus on the costs of production. But investors in ABX need to pay close attention to the debt situation (it caused them to issue a massive amount of shares in Q3FY13) and the situation of individual projects like their recent suspension of Pascua Lama.
Barrick's Q3FY13 true all-in costs (costs excluding write-downs) increased on a year-over-year basis from $1270 in Q3FY12 to $1378 in Q3FY13, and they also increased from the $1264 FY2012 average. But investors need to keep in mind that in Q3FY13 ABX reported a tremendous $748 million in taxes - which is exceptionally high and we expect will be much lower in Q4FY13.
In terms of ABX's core costs (removing taxes and write-downs), costs increased slightly from $1023 in Q2FY12 to $1033 in the current quarter. But this quarter's costs were lower than the $1065 experienced in FY2012 and the $1088 seen in the previous quarter. This suggests to us that management is getting a better handle on costs and they seem to have flattened. Additionally, the company was helped by an increase in total gold production to 1.845 million ounces in the quarter, which was about a 30,000 increase over Q3FY13 production.
Since Barrick is one of the first companies we are analyzing in terms of Q3FY13 results, we do not have many comparisons yet from other companies' third quarter reports. Compared to ABX's $1378 per gold-equivalent ounce, other gold companies reported the following costs: Goldcorp (costs under $1200) and Agnico-Eagle (costs under $1150).
But comparing ABX to the second quarter true all-in costs of other companies they compare as follows: Yamana Gold (AUY) (costs over $1300), Newmont Gold (NEM) (costs over $1600), Eldorado Gold (EGO) (costs under $1100), Gold Fields (GFI) (costs over $1500), Allied Nevada Gold (costs over $1300), Alamos Gold (AGI) (costs under $1250), Kinross Gold (KGC) (costs over $1500), Randgold (GOLD) (costs over $1000), IAMGOLD (IAG) (costs over $1300), and Richmont Gold (RIC) (costs over $1300), and Silvercrest Mines (SVM) (costs over $1000).
We caution investors to do those comparisons with a grain of salt since these comparisons are for different quarters and use different metal conversion rates.
According to our all-in costs measures, it seems like Barrick management is starting to get some control over gold costs as costs flatten and production starts to rise. But we would caution that all-in costs only tell part of the story as ABX has some significant debt related issues to address and with the suspension of Pascua Lama - future production has taken a big hit. We believe investors need to proceed with caution when investing in ABX shares.