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 Randgold Resources Limited (NASDAQ:GOLD), an African focused miner with operations in Mali, Sengal, the Ivory Coast, and a development project in the Congo. As an African operator Randgold faces significant country risk, but so far management has managed to negotiate these risks smoothly, but investors should pay close attention to political issues in Africa (especially Mali) but this is beyond the scope of this article.
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 Randgold Resources
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. Since Randgold doesn't produce anything but gold, it makes it unnecessary to convert any of its other production into gold-equivalent ounces, which makes things easier to analyze - Randgold produces gold and only gold.
Important Notes about True All-in Costs Table
Randgold changed the way it does it accounting as of Q1FY13 to account for the Kibali and Morila 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 Randgold's total.
Observations for Randgold Investors
Randgold's Q3FY13 true all-in costs (costs excluding write-downs) increased on a year-over-year basis from $965 in Q3FY12 to $1174 in Q3FY13, which was a large increase year-over-year, but the costs remain on the lower end of what other gold miners have reported. On a sequential basis, costs rose from Q2FY13's excellent $965 per ounce, but most of this seemed to be related to the expiration of a tax holiday at the Guonkoto complex.
In terms of Randgold's core costs (removing taxes and write-downs), costs did rise slightly on a year-over-year basis with Q3FY13 costs at $1042 per gold-equivalent ounce compared to $915 in Q3FY12, but was flat on a sequential basis as Q2FY13 core costs were $1040 per ounce. After the prior mentioned tax holiday expiration, we can probably expect core costs to be over $1000 for the foreseeable future.
Compared to Randgold's $1174 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), Iamgold (NYSE:IAG) (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 Randgold's true all-in costs ranks it on the lower cost end of gold miners, which it has done fairly consistently since we've started following the company. If you can manage the political and infrastructure risks associated with central and western Africa, which Randgold seems to be doing, you can produce gold at relatively low costs.
Randgold's third quarter true all-in costs totals rose, but their capital expenditures probably peaked out in the quarter and the production increases in gold were notable. Additionally, with the increases in costs, the company still ranks as one of the lower cost gold miners as it has been for the last few years. Even though the company has lower cash levels, the balance sheet remains very strong with no debt, an undrawn $200 million dollar credit facility, and gold production that should remain profitable at current gold prices. Investors willing to stomach the political risk of an African miner, should consider Randgold for their portfolios as it is one of the best gold miners in Africa.