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 all-in costs of Iamgold (NYSE:IAG), 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 Niobum mines, and the company has a world market share of approximately 8% in ferro-niobium which contributes a little less than 20% of the company's revenues.
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 IAG
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 price for Q3FY13 which results in a Niobium-to-gold ratio of 36.9:1 (assuming a Niobium price of around $43 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.
Notes about All-in Costs Table
As we've mentioned in our previous articles, IAG changed the way it does it 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 and not including their costs as expenses on the company's income statement - thus we have to remove their attributable production from IAG's total.
Secondly, the company does not include Westwood production in its total top-line production numbers, and rather nets Westwood's totals against Westwood's capital expenses. We prefer to include this production as a part of the company's total gold production because it more accurately reflects true gold production, thus we have included the quarter's Westwood production number (43,000 gold ounces) in this quarter's total.
Observations for IAG Investors
Iamgold's Q3FY13 true all-in costs (costs excluding write-downs) decreased on a year-over-year basis from $1302 in Q3FY12 to $1103 in Q3FY13, which was a large improvement on this basis. Additionally, the current quarter's true all-in costs were improved on both a sequential and compared to FY2012 cost levels of $1366 - which was a positive factor for the company. We do note that total costs haven't been dropping significantly; instead we're seeing higher production totals as a major contributor to the lowering of costs.
In terms of IAG's core costs (removing taxes and write-downs), costs did rise slightly on a year-over-year basis with Q3FY13 costs at $920 per gold-equivalent ounce compared to $889 in Q3FY12 - which shows that tax relief was a significant contributor to this quarter's lowered all-in costs. But core costs seem to be dropping on an ongoing basis from those experienced in FY2012 ($961 per gold-equivalent ounce), which shows that cost controls are having an effect and the lowering of costs isn't a mere tax adjustment.
Compared to IAG's $1103 all-in gold-equivalent costs; the other gold companies we've covered in so far in Q3FY13 have reported the following costs: Newmont Mining (NYSE:NEM) (costs under $1200), Kinross Gold (NYSE:KGC) (costs around $1200), Goldcorp (NYSE:GG) (costs under $1200), Yamana Gold (NYSE:AUY) (costs over $1150), Alamos Gold (NYSE:AGI) (costs above $1250), 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 IAG's true all-in costs ranks it pretty much at the top position of the gold miners we've covered for the quarter - an accomplishment for a company that has struggled in previous quarters to control costs.
Other Notes for IAG Investors
The company recently announced that it was suspending its dividend, and while investors will not be happy about this, we can't fault management for this decision especially considering that true all-in costs leaves the company little room for profit at current gold prices. Additionally, investors who didn't see this coming were simply not analyzing the company's balance sheet which clearly shows that the 5% dividend (close to $100 million per year) was not sustainable at current gold prices - this announcement shouldn't have been much of a surprise to investors that follow the company.
While the company may drop following this announcement as a short-term knee-jerk reaction, we really think that this should have already been baked into the stock price and investors who are interested in the company should take this as an opportunity to get in at a lower price. This was clearly the right move by management to conserve cash.
The reason why we don't own shares in IAG is that we dislike the size of the company's debt position at around $640 million, and calculated using total cash flows, that number comes out to close to $1 billion dollars. While the company has sufficient liquidity to meet the payments of this debt (most of it is due after 2017), it will be a burden on cash flow and we simply prefer to invest in companies with lower debt levels.
All in all, management's cost cuts produced a very strong quarter from an all-in costs perspective as true all in costs dropped to around $1103 dollars per gold-equivalent ounce which was a significant improvement on previous quarters. The improvement was due to a combination of both cost cuts and production increases - which is a very potent combination. If the company can keep up its cost improvements, then IAG can shed its tag as a higher-cost producer and join the ranks of the top-tier gold miners on a true all-in costs basis.
Additionally, the recent dividend cut should be no surprise to investors and was the right move by management. Investors interested in IAG and willing to stomach its larger debt position, may want to take this opportunity to accumulate shares on an announcement that should have already been built into the stock price.
Disclosure: I am long GG, GOLD, SGOL, AGI, SVLC. 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.