- Goldcorp's fourth quarter true all-in production costs hit $2031 per gold-equivalent ounce, but mostly due to the realization of new taxes.
- Goldcorp's core non-tax costs dropped sequentially to $1072 per gold-equivalent ounce.
- Fourth quarter metal production increased significantly in all categories, but this increase may be a result of the new Mexican Tax law that will be implemented in Q1FY14.
- Goldcorp's results look decent, but we will have to wait to compare to other gold miners to put them in context.
In our complete Q3FY13 cost analysis, we went over a number of the industry's all-in costs to mine an ounce of gold in Q3FY13 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 Q3FY13 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 costs of production of Goldcorp (NYSE:GG), one of the largest gold mining companies in the world. Goldcorp produces gold, silver, copper, lead, and zinc in countries located strictly in North and South America - an overview of their development projects and mines can be found here on their website.
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 previous 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 Goldcorp
Let us use this methodology to take a look at Goldcorp'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 Q4FY13 which results in a silver-to-gold ratio of approximately 61:1, copper-to-gold ratio of 393:1, lead-to-gold ratio of 1325:1, and a zinc-to-gold ratio of 1462:1. 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.
Notes about the Table and Goldcorp's Revenues and Costs
In 2013 Goldcorp changed the way that it accounts for its Alumbrera and Pueblo Viejo projects to account for them 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.
This affects true all-in costs in two ways. First, this new method of accounting removes all revenues and costs associated with these projects, replacing them with only net income. Since we are interested in costs to mine gold, this would throw off the calculation because the costs are no longer included in the statement, thus we also have to treat this production as an equity investment and remove the attributed ounces of these mines from the calculation.
For our purpose that means that all production from Alumbrera and Pueblo Viejo will not be included in our gold-equivalent calculations (we have removed the gains/losses from these operations as well). Since Alumbrera produces the company's copper production we will also remove this production from the calculations, but we have included "top-line gold" so that investors can get an idea of the all-inclusive gold production for the company.
Finally, we adjust our all-in costs to the most recent quarter's metal prices, which means that previous quarter's costs will change as the ratios between the metals change.
Observations for Goldcorp Investors
Goldcorp's Q4FY13 true all-in costs (Costs excluding write-downs) rose on a year-over-year basis from $1069 in Q4FY12 to $2031 in Q4FY13 - which is obviously a tremendous gain in the costs of production. But this was artificially high and due primarily to the realized $787 million in taxes associated to the change in the Mexican tax law which we briefly addressed earlier this year. This extreme tax realization also boosted FY2013 true all-in costs to over $1500 per gold-equivalent ounce, but again this is primarily due to the large tax realization seen in the fourth quarter.
For this particular quarter and year we much prefer to get a feel for costs by using the company's core non-tax costs (removing taxes and write-downs). For the fourth quarter, these costs actually dropped to $1071 per gold-equivalent ounce from $1213 in the previous quarter, but these core non-tax costs were up year-over-year from the $910 seen in Q4FY13. Annual core non-tax costs were also up in FY2013 from $991 seen in FY2012 to $1118 in FY2013 - so costs have been rising for the company.
Since Goldcorp is the first company we are analyzing fourth quarter all-in costs for we have no comparisons, but for investors wishing to compare the company's fourth quarter performance to the third quarter true all-in costs of other gold companies they are as follows: Newmont Mining (NYSE:NEM) (costs under $1200), Kinross Gold (NYSE:KGC) (costs around $1200), Yamana Gold (NYSE:AUY) (costs over $1150), Alamos Gold (NYSE:AGI) (costs above $1250), Goldfields (NYSE:GFI) (costs around $1350), 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 quarterly cost leader Eldorado Gold (NYSE:EGO) (costs just over $1100). Of course investors should note that these are the third quarter all-in costs for these companies and thus all comparisons should be done with a grain of salt.
Finally, one very interesting thing to note about Goldcorp's production is that silver production rose from 7.6 million ounces in Q3FY13 to 9.4 million ounces in Q4FY13 - a tremendous increase in production in a short timeframe (gold production also rose significantly quarter-over-quarter). We haven't delved into the details of this production increase, but we wouldn't be surprised if it was due to the company producing as much gold and silver from Mexican properties before the new Mexican tax law comes into effect in 2014 (which will raise the costs of all gold and silver production). We will be very interested to see what Q1FY14 production will be and if there will be a drop as the company returns to more regular production growth levels.
If this large rise in production is a temporary phenomenon due to increasing production before the new tax law comes into effect, then management is doing the right thing to increase shareholder earnings, but investors should also not be surprised if production drops off a bit in Q1F14.
Goldcorp's true all-in costs in Q4FY13 were a tremendously high $2031 per gold-equivalent ounce, but this was primarily the result of the realization of almost $800 million in quarterly taxes (keep in mind the company only paid a little over $400 million in taxes in all of 2012). The core non-tax costs for Q4FY13 were a reasonable $1072 per gold-equivalent ounce, which looks good to us on first glance but we will need to see what the rest of the miners report before we can put that into a useful context.
The company did increase production of almost everything in Q4FY13, and for the year gold production was up compared to FY2012, but silver production and gold-equivalent production was down. More importantly, both true all-in costs and core non-tax costs were also up on an annual basis - but we're not surprised because that trend is being seen across the industry as each ounce gets more expensive to mine.
In terms of costs of production, Goldcorp had a decent fourth quarter when excluding the large tax burden while raising production of almost all metals in Q4FY13 - though we wouldn't be surprised if this was more due to soon to be implemented Mexican Tax law rather than organic growth. At first glance production costs look good, but we will need to compare these costs to Goldcorp's competitors to get a better feel for the true fourth quarter and annual performance.
Disclosure: I am long GG, GOLD, AGI, 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.
Additional disclosure: The AGI position is very small so do not use it as a basis for initiating your own position