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 Goldfields Limited (NYSE:GFI), one of the world's major gold producers with copper byproduct that own operating mines in Australia, Africa, and South America.
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 Goldfields
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.
Important Notes about True All-in Costs Table for Goldfields
Goldfields spun off a number of its operations into Sibanye Gold and thus had to restate prior quarter costs and gold production. We have included the restated numbers for Q1FY13, Q2FY13, Q3FY12, and Q3FY13, but the FY2011 and FY2012 are the old calculations and we will need to wait until Goldfields restates those before updating our figures. That means any comparisons between the restated and old numbers will have discrepancies and should only be done with that knowledge. As the company restates prior periods we will update the quarters and the all-in costs table.
Observations for Goldfields Investors
Goldfields has been busy trying to shift its focus from focusing on the number of ounces produced to focusing on a cost-per-ounce approach that only produces sustainable ounces. This is what we're starting to see in the company's costs per ounce as Q3FY13 true all-in costs (costs excluding write-downs) decreased on a year-over-year basis from $1449 in Q3FY12 to $1348 in Q3FY13, which was almost a 10% decrease in costs. Production costs also declined compared to FY2012 and compared to the previous quarter where costs were an exceptionally high $1490. The drop in costs from the previous quarter seems to be due to a combination of production increases and cost decreases.
In terms of Goldfields's core costs (removing taxes and write-downs), costs did rise on a year-over-year basis with Q3FY13 costs at $1192 per gold-equivalent ounce compared to $1074 in Q3FY12. But core costs did drop on a sequential basis from Q2FY13's $1363 per gold-equivalent ounce, but we'd like to see them drop under $1100 per gold-equivalent ounce to be more sustainable at current gold prices.
Compared to Goldfields's $1348 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), Randgold (NASDAQ:GOLD) (costs above $1150), 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 Goldfield's true all-in costs ranks it close to the highest costs on our coverage list, and though they've been improving there is still quite a way to go.
Goldfields is still a work-in-progress as management works to reduce costs, and as investors in the current gold price environment we will wait to see either a higher gold price or more cost cuts by management that bring their true all-in costs to more profitable levels. Additionally, the company does have a significant debt load (though there is a nice cash cushion on balance sheet) and investors should make sure they note that.
Though we also must say that the company's share price has dropped much more than their fellow majors and if the gold price increases, there is much more leverage to Goldfield's stock price then maybe the other majors because of its lower cost margins. It would truly be a potent formula for the stock price if the gold price rose and the company was able to drop true all-in costs to the mid-range of other gold miners.