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 real costs of production of Alamos Gold (NYSE:AGI), a junior miner with operations in Turkey and Mexico. Alamos's major producing mine is the Mulatos mine in Mexico, and the company is developing two mines in northwest Turkey.
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 AGI
Let us now use this methodology to take a look at AGI's results and come up with their average cost figures.
Observations for AGI Investors
Alamos Gold's Q3FY13 true all-in costs (costs excluding write-downs) increased on a year-over-year basis from $1080 in Q3FY12 to $1262 in Q3FY13, which has been a trend in the recent quarters. Additionally, though costs have stabilized a bit sequentially, they are still rising and the true all-in costs are significantly higher than those realized in FY2011 and FY2012. This seems to be a combination of slightly lower production totals and rises in total operating costs, which leads to larger increases in per-ounce production costs.
In terms of AGI's core costs (removing taxes and write-downs), costs have continued to rise with Q3FY13 costs at $994 per gold-equivalent ounce, which was the highest costs we've seen for the core totals in the last few quarters. Additionally, it is looking like FY2013 will have core costs significantly higher than the previous years and will be close to $1000 per ounce. Though this is not above the average industry standard for core costs, it is above AGI's previous cost standards and it brings the company's costs from exceptionally low to average or slightly above average in terms of costs.
Compared to AGI's $1262 gold-equivalent ounce all-in cost; the other gold companies we've covered in so far in Q3FY13 have reported the following costs: Newmont Mining (NYSE:NEM) (costs under $1200), Goldcorp (NYSE:GG) (costs under $1200), Yamana Gold (NYSE:AUY) (costs over $1150), Barrick Gold (NYSE:ABX) (costs above $1350), Agnico-Eagle (NYSE:AEM) (costs under $1150), and current quarterly cost leader Eldorado Gold (NYSE:EGO) (costs just over $1100). As investors can see, in terms of Q3FY13 costs, Alamos Gold's costs are average or slightly above average versus its competitors.
Comparing AGI to the second quarter true all-in costs of other companies they compare as follows: Goldfields (NYSE:GFI) (costs over $1500), Allied Nevada Gold (costs over $1300), Kinross Gold (NYSE:KGC) (costs over $1500), Randgold (NASDAQ:GOLD) (costs over $1000), IAMGOLD (NYSE:IAG) (costs over $1300), and Richmont Gold (NYSEMKT:RIC) (costs over $1300), and Silvercrest Mines (NYSEMKT: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.
One more thing that investors should note is that Mexico recently passed a law to increase taxes on miners (and a number of other industries) and since AGI's production is primarily in Mexico, this may have a significant impact on company performance and the tax burden - investors should take note.
Alamos Gold Q3FY13 was not a particularly good quarter for the company in terms of its true all-in costs, as they rose to $1262 per gold ounce. While this wasn't extremely high compared to other gold miners, it was definitely high in terms of AGI's past performance and is moving the company down the all-in cost ladder to an average producer.
Though we do stress to AGI investors (and we have a moderate position in the company as of the writing of this piece) that there are obviously other factors to consider, but from an all-in costs point of view the company has been underperforming over the last few quarters. Management has been aggressively acquiring other companies during this gold downturn, which is a positive in our opinion, but we would want to see current average production costs drop (unlikely given the Mexican tax increase) or significant progress with the Turkish development projects (investors should watch events at the Kirazli project) that will increase future production at a low-cost.
Disclosure: I am long AGI, GG, SVLC, RIC, GOLD, SGOL. 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.