- Barrick's fourth quarter and FY2013 costs per ounce rose at around a 10% rate.
- Management lowered FY2014 production by 10-15% even as it expects costs to rise slightly.
- Gold investors should be very encouraged by Barrick's announced drop in production and rising costs.
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 gold 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 Barrick Gold (ABX), one of the largest gold producers in the world. Barrick produces gold and copper in four continents (North America, South America, Australia and Africa) and is an important indicator of mining production and costs since it is the largest gold producer in the world.
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 regard 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 and 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 Barrick Gold
Let us use this methodology to take a look at Barrick'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 copper-to-gold ratio of 393:1. 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 Investors
Barrick's Q4FY13 true all-in costs (costs excluding write-downs) rose on a year-over-year basis from $1352 in Q4FY12 to $1675 in Q4FY13, which is an extremely large rise in the cost of production. But we do caution that since the company reported a large write-down in the fourth quarter due to impairments on existing assets, it will affect this calculation because we have to estimate the tax benefit of the impairment (we use a 30% tax rate).
Thus for companies that experience large annual or quarterly impairments we prefer to use the core non-tax costs (removing taxes and write-downs), which will give us a good idea of the comparative change in costs (i.e. are they rising or falling). But it will also understate costs since it removes declared income taxes from the cost figure - so the true costs of production will be somewhere in between these numbers.
For the fourth quarter, Barrick's core non-tax costs rose from $1,208 per ounce in Q4FY12 to $1348 in Q4FY13, which is a significant 10% rise in costs. Barrick tends to report higher fourth quarter costs, so the annual costs are lower than experienced in the fourth quarter ($1110 in FY2013 versus $1009 in FY2012) but they still rose at around 10% for the year.
Since Barrick is the second company that we've published an all-in cost analysis, we can only compare its fourth quarter costs to competitor Goldcorp (GG) (fourth quarter all-in costs around $2000 - but this was due to extremely large realized taxes).
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 (NEM) (costs under $1200), Kinross Gold (KGC) (costs around $1200), Yamana Gold (AUY) (costs over $1150), Alamos Gold (AGI) (costs above $1250), Goldfields (GFI) (costs around $1350), Randgold (GOLD) (costs above $1150), Agnico-Eagle (AEM) (costs under $1150), Iamgold (IAG) (costs under $1150), and Eldorado Gold (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.
We also note the following guidance from the company's recent quarterly report.
What we want to point investors' attention to is that Barrick is expecting to produce 10-15% less gold at higher costs. We're not faulting the company for this, since these costs may be lower than many competitors, but gold investors should take this as a significantly bullish indicator - if the largest gold producer in the world is cutting production AND expecting to produce gold at a higher cost then chances are the rest of the industry will be doing the same.
As we've stated before, we don't believe the gold price in the $1,200 or $1,300 range is sustainable in the long-term and the gold price will need to be much higher for gold production to remain anywhere near current levels. This is something that should be very interesting to physical gold and gold ETFs investors (GLD, PHYS) - we expect to see more of the same from the other miners as their FY2014 production and cost outlooks are released.