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 Agnico-Eagle (NYSE:AEM), a mid-tier producer with mines in Canada, Mexico, and Finland. Also, the company is led by Mr. Sean Boyd, one of our personal favorite CEOs in the mining industry.
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 Agnico-Eagle
Let us use this methodology to take a look at Agnico-Eagle'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, 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.
Observations for Investors
Agnico Eagle's Q4FY13 true all-in costs (costs excluding write-downs) rose on a year-over-year basis from $1393 in Q4FY12 to $1449 in Q4FY13, which mostly due to the write-downs realized by the company in the fourth quarter, which 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, Agnico Eagle's core non-tax costs declined from $1337 per ounce in Q4FY12 to $1054 in Q4FY13, which is an excellent drop in costs of almost 30% year over year. On a sequential basis costs rose slightly from $1045 in the third quarter to the current $1054 in the fourth quarter. Finally, on an annual basis the company saw its core costs decline from $1223 in FY2012 to $1180 in FY2013, which is a very good sign. In fact, Agnico Eagle's core non-tax costs were actually lower than both Goldcorp (NYSE:GG) (quarterly core non-tax costs of $1072) and Barrick Gold (NYSE:ABX) (quarterly core non-tax costs of $1348) - a significant accomplishment for this growing mid-tier producer.
We have yet to analyze the true all-in costs of many of the majors, 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), Iamgold (NYSE:IAG) (costs under $1150), and 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.
All in all, we feel that Agnico-Eagle had a very good fourth quarter and FY2013 as it was able to lower its all-in costs from being on the higher side of the industry to a lower cost producer. In fact, the company actually produced gold at a lower core non-tax cost (removing taxes and write-downs) on a gold-equivalent basis than both Barrick and Goldcorp. The question for investors is if this can be sustained or is it merely a temporary lowering of costs (after all we really started to see costs drop in Q3FY13) that will rise in future quarters - we'll have to wait and see.