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 Newmont Mining Corporation (NYSE:NEM), one of the largest gold producers in the world. NEM produces gold and copper in seven countries (United States, Australia, Peru, Indonesia, Ghana, New Zealand, and Mexico) and employs around 40,000 employees and contractors.
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 Newmont Mining
Let us use this methodology to take a look at Newmont'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.
Notes about Newmont Mining table
For most of the companies we cover we usually use the attributed gold or silver totals (the amount that is truly dedicated to the miner), but for Newmont Mining we've used their consolidated totals and then subtracted the "non-controlling interests" expenses. We may change this in the future, but for now we believe that accurately reflects the costs of production for the company.
Observations for Investors
Newmont's Q4FY13 true all-in costs (costs excluding write-downs) actually fell on a year-over-year basis from $1341 in Q4FY12 to $1126 in Q4FY13, but since we've had large write-downs that tend to skew this number. 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, Newmont's core non-tax costs dropped from $1329 per ounce in Q4FY12 to $1244 in Q4FY13, which is a nice drop in costs primarily due to an increase in production. On an annual basis core non-tax costs rose from $1163 in FY2012 to $1258 in FY2013, which is a little higher than other of Newmont's competitors which are usually around $1100 per gold-equivalent ounce.
Since almost all the intermediate to large miners experienced large write-downs which affects our all-in true costs calculations, we think it is more relevant to compare their core costs. For this quarter, Newmont's fourth quarter core costs of $1244 compare with its competitors as follows: Goldcorp (NYSE:GG) (core costs of $1072), Barrick Gold (NYSE:ABX) (core costs of $1348), Yamana Gold (NYSE:AUY) (core costs of $1096), and Agnico-eagle (NYSE:AEM) (core costs of $1054).
Newmont Mining offers investors its "All-in Sustaining Costs per Ounce" which registers at $1105 for FY2013, while our core costs (excluding taxes) are $1258 for the year - what's the difference? For those new to this series, the difference is we include everything in terms of costs while Newmont (and other gold companies) still only include some costs in their all-in sustaining cost totals.
For example, Newmont had total costs (used in their all-in sustaining costs calculation) of $6.06 billion (see page 91 of their annual report) which obviously leaves out a number of costs outside of their $4.35 billion write-down. Just a simple back-of-the-napkin calculation of the difference between their revenues ($8.3 billion) and their income before taxes (-$3.6 billion) show at least $7 billion in expenses other than the company's write-down. So obviously the all-in sustaining costs number is not the complete costs picture.
We don't blame Newmont since they are just following the standards set by the World Gold Council, but investors should know that true costs are usually a bit higher than the all-in sustaining number suggests - that's why we put out these articles detailing the core and true all-in costs.
Conclusion for Investors
Obviously we can't do a full analysis on a company of the size of Newmont Mining in a few pages, but based on our true all-in cost analysis, Newmont's fourth quarter was relatively decent on a stand-alone basis as its fourth quarter costs were below its Q4FY12 and its FY2013 cost totals. But compared to competitors such as Goldcorp and Agnico-eagle, its costs of production were higher in the fourth quarter.
Additionally, investors may also want to note that Newmont is one of the few gold miners where production is actually rising, as the 1.52 million consolidated ounces were the highest quarterly totals for the company in quite some time and were clearly higher than the year-ago levels. All in all we found Newmont's fourth quarter and FY2013 to be a bit mixed, but we would be very interested to see how the company performs in a quarter without significant write-downs (we anticipate Q1FY14 will be that quarter).
Disclosure: I am long SGOL, GG. 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.