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 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.
How to Use Our All-in Costs Analysis with Your Investments
In the previously mentioned article, we gave a thorough overview of the current way that 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.
The best way to use this analysis for individual companies is to compare the different production cost metrics with the company's profits to look for any anomalies (e.g. large net profits but high costs). Also, we provide historic data to allow investors to check out any trends in regards to costs or production totals that may be an early warning to future successes or failures for the company. Ultimately, this analysis is best used as a first step to further investigative work, and that is our purpose with releasing this series.
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 NEM
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.
Observations for NEM Investors
Newmont Gold's Q3FY13 true all-in costs (costs excluding write-downs) dropped on a year-over-year basis from $1323 in Q3FY12 to $1172 in Q3FY13 - which was a noted improvement on this measure. Additionally, all-in costs were down from the FY2012 yearly average of $1274 and significantly down from the $1961 seen during Q2FY13, a quarter dominated by a $2 billion writedown. We would caution investors about taking this drop in costs to be structural because the previous quarter had an extremely large loss and sometimes company management like to take advantage of a large losing quarter to throw in other costs to help future quarters. NEM may be significantly improving costs but we'd need to see a few quarters of lower costs before we start feeling confident about it.
In terms of NEM's core costs (removing taxes and write-downs), costs have continued to drop with Q3FY13 costs at $969 per gold-equivalent ounce, which was a significant drop on both a sequential and year-over-year basis. Again, we do caution that this number may be benefiting from costs assessed in the previous quarter (in which core costs over $1900!).
Compared to NEM's $1172 gold-equivalent ounce all-in cost; the few other gold companies we've covered in so far in Q3FY13 have reported the following costs: Goldcorp (GG) (costs under $1200), Yamana Gold (AUY) (costs over $1150), Barrick Gold (ABX) (costs above $1350), Agnico-Eagle (AEM) (costs under $1150), and current quarterly cost leader Eldorado Gold (EGO) (costs just over $1100). As investors can see, in terms of Q3FY13 costs, Newmont Gold's costs are quite good compared to the other majors.
Comparing NEM to the second quarter true all-in costs of other companies they compare as follows: Goldfields (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 (SVLC) (costs over $1000).
We caution investors to do those comparisons to other companies' second quarter numbers with a grain of salt since these comparisons are for different quarters and use different metal conversion rates.
Newmont had a very good Q3FY13 in terms of its all-in costs ($1171) and its core costs ($969), with both lowering on a sequential and year-over-year basis. There is an asterisk next to these cost totals though because the company did have an exceptionally expensive Q2FY13 even after excluding the $2.2 billion dollar write-down - some of the cost relief in this quarter may have occurred as a result to assigning it in the second quarter. We obviously can't assume this, but we would like to see costs stay low for another few quarters before we assume structural cost reductions have been realized. Production gold and copper totals also increased in the quarter, but NEM's gold production numbers may not reach last year's totals, so it has to be taken with a grain of salt.
All in all, NEM had a good quarter and dropped production costs and realized a profit at gold prices in the mid-$1300's. This has been a trend we've been seeing with miners across the industry, but two major questions we're asking are (1) are these cost improvements structural or transitory and (2) are these cost reductions being done at the cost of future production? We will have to wait and see.