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 Gold Fields Limited (NYSE:GFI), one of the world's major gold producers. The company owns operating mines in Australia, Africa, and South America.
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 & 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 Gold Fields
Let us use this methodology to take a look at Gold Field'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 FY2013, which results in a copper-to-gold ratio of 393:1 pounds to ounces of gold. 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.
Important Notes about True All-in Costs Table for Gold Fields
Gold Fields spun off a number of its operations into Sibanye Gold, and thus, had to restate prior-quarter costs and gold production. We have included the restated numbers for previous quarters - including FY2012.
Observations for Investors
Gold Field's Q4FY13 true all-in costs (costs excluding write-downs) actually fell significantly on a year-over-year basis from $1431 in Q4FY12 to $1310 in Q4FY13 - a significant improvement for one of the historically expensive gold producers. But since the company did experience a large write-down in the quarter, 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, Gold Field's core non-tax costs also fell from $1294 per ounce in Q4FY12 to $1201 in Q4FY13 - which is a significant drop in costs. On an annual basis, core non-tax costs rose slightly from $1243 in FY2012 to $1277 in FY2013 - not as good as seeing falling core costs, but it's a minor rise in costs, which is actually less than the rise experienced by many other miners in the industry.
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, Gold Field's fourth-quarter core costs of $1294 are still higher than the core costs of many of its competitors, and it compares as follows: Goldcorp (NYSE:GG) (core costs below $1100), Barrick Gold (NYSE:ABX) (core costs above $1300), Newmont Gold (NYSE:NEM) (core costs around $1250), Alamos Gold (NYSE:AGI) (core costs above $1150), Yamana Gold (NYSE:AUY) (core costs close to $1100), Eldorado Gold (NYSE:EGO) (costs below $1100), and Agnico Eagle (NYSE:AEM) (core costs below $1100).
Conclusion for Investors
Even though Gold Fields remains one of the higher-cost gold producers, it is clearly working hard to drop costs - fourth-quarter costs are the lowest in quite some time in terms of both its true all-in costs and its core non-tax costs ($1310 and $1201 respectively). Additionally, the company had a significant increase in production in the fourth quarter, as its production hit 555,000 ounces of gold production. This actually compares favorably to the company's expected increase in production for FY2014 (around 2.2 million ounces), and shows that management's outlook is very achievable.
If the company can keep this up, there may be some alpha for investors as its cost structure changes favorably - investors pegging it as an "avoidable, high-cost producer" may find themselves on the wrong side of that argument.
Disclosure: I am long AGI, 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.