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 real costs of production of Yamana Gold (NYSE:AUY), a mid-tier producer primarily focused in South America with mines in Brazil, Argentina, Mexico, and Chile. The projects in Argentina have a higher element of political risk, which is something investors should note, but that discussion is outside the scope of this article. Nevertheless, investors interested in AUY should keep tabs on the political situation in Argentina because events there may significantly impact the future of AUY's operations in that country.
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 Yamana Gold
Let us use this methodology to take a look at Yamana'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 and 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.
Notes about Yamana Gold Totals
In 2013 Yamana changed the way that it accounts for its Alumbrera project, which it now accounts as a joint venture equity investment rather than a joint operation. 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.
Secondly, it means that comparisons with prior quarters (pre-2013) are going to be much more difficult because production totals and costs include Alumbrera, while in 2013 these costs and gold production will not be included.
To deal with this issue we will remove Alumbrera production (though we will note it in the top-line figures) and use only the production the company does not treat as an investment.
Observations for Investors
Yamana's Q4FY13 true all-in costs (costs excluding write-downs) rose on a year-over-year basis from $1133 in Q4FY12 to $1478 in Q4FY13. This was 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, Yamana's core non-tax costs rose from $895 per ounce in Q4FY12 to $1096 in Q4FY13, which is a rise in costs but puts the company pretty much in-line with the low cost producers' core costs (usually a little above $1000). Finally, on an annual basis the company saw its core costs rise from $990 in FY2012 to $1042 in FY2013, which is only a 5% rise in costs which is not bad for a larger miner like Yamana.
Since almost all the intermediate to large miners experienced large write-downs which affected our all-in true costs calculations, we think it is more relevant to compare their core costs. For this quarter, Yamana's fourth quarter core costs of $1096 compare with its competitors as follows: Goldcorp (NYSE:GG) (core costs of $1072), Barrick Gold (NYSE:ABX) (core costs of $1348), and current core-costs leader Agnico-eagle (NYSE:AEM) (core costs of $1054).
Conclusion for Investors
Based on its cost Yamana Gold seems to be stabilizing cost figures, as its true all-in costs for FY2013 were almost in-line with its FY2012 ($1251 versus $1252), though significant write-downs in FY2013 make this a hard to compare total. In terms of core costs (excluding taxes and write-downs), Yamana's costs are rising but are pretty much in-line with the low cost producers in the industry as they averaged $1042 for FY2013 and $1096 in Q4FY13. Of course these costs do not include taxes, and so even though Yamana is showing relatively low costs compared to competitors, their profits with the current gold price a bit over $1300 should not be particularly high.
Regardless, the company should be classified as a low-cost producer, but as investors we would be very interested to see what the true all-in costs figure would be without significant write-downs.
Disclosure: I am long GG, 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.