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 Kinross Gold (KGC), a mid-tier producer of gold and silver with operations that span the globe. They have operating mines in North America, South America, West Africa, and Russia.
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 KGC
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 an approximate silver-to-gold ratio of 62:1.
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 KGC Investors
Kinross Gold's Q3FY13 true all-in costs (costs excluding write-downs) decreased on a year-over-year basis from $1320 in Q3FY12 to $1201 in Q3FY13, which has been the trend in the recent quarters. We do note that KGC reported a tremendous $2 billion dollar write-down in Q2FY13, which tends to have significant impacts on the following quarter cost allocations as these allocations can be non-linear - so we would caution investors that some costs may have been allocated to the dismal Q2FY13 quarter which may make this quarter look a bit better. We would want to see another quarter or two to make us feel more comfortable that costs are consistently dropping. Nevertheless this was a good quarter in terms of bringing all-in costs down.
In terms of KGC's core costs (removing taxes and write-downs), costs did rise slightly on a year-over-year basis with Q3FY13 costs at $1043 per gold-equivalent ounce compared to $1021 in Q3FY12 - this shows that tax relief (probably due to the lower gold price) had an impact on the cost structure as core costs ended up rising. But core costs did drop compared to both FY2011 and FY2012 - which is a very good sign that shows that the drop in costs isn't all a phenomenon related to tax relief. But we do caution that it is only one quarter, and the previous quarter did see core costs rise to a staggering $1455, so we just don't know how much was allocated to the previous quarter to setup an improvement for this quarter.
Compared to KGC's $1201 all-in gold-equivalent costs; the other gold companies we've covered in so far in Q3FY13 have reported the following costs: Newmont Mining (NEM) (costs under $1200), Goldcorp (GG) (costs under $1200), Yamana Gold (AUY) (costs over $1150), Alamos Gold (AGI) (costs above $1250), 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, Kinross Gold's cost improvement brings it to an average or slightly above average position versus its competitors.
Comparing KGC 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), 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.
Kinross Gold Q3FY13 was a good quarter for the company in terms of its true all-in costs, as they dropped to $1201 per gold-equivalent ounce - which was quite an improvement for the company that ranked close to the bottom of the all-in costs scale. While the company still is around average or slightly above average in terms of its costs, trending improvement is a good thing for investors to see. But investors should note that in Q2FY13 costs were exceptionally high even when excluding the large write-down that the company took in that quarter - we would want to see more cost improvement in KGC to make sure that costs are truly coming down versus simple quarter to quarter accounting allocations.