In our previous complete Q3FY13 cost analysis, we went over a number of the industry's all-in costs to mine an ounce of gold in 2013 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 2013 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.
We're still working on completing and publishing a complete FY2013 and first half 2014 all-in costs for the industry, so if you are interested in receiving it and keeping up-to-date on consider following me (clicking the "Follow" button next to my name) or join our free email list where we send out a weekly email summarizing all the important events in the gold and silver industry, which includes our latest articles and research pieces and all of our all-in pieces as they are published.
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. Newmont 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 Q2FY14 which results in a copper-to-gold ratio of 418:1 (average copper price of 3.08 for the quarter). 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 or revenues (in the last two quarters it has actually increased NEM's profitability). 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) fell on a year-over-year basis from $1811 in Q2FY13 to $1094 in Q4FY13, but since we've had large write-downs that tends 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 second quarter, Newmont's core non-tax costs dropped from $1579 per ounce in Q2FY13 to $1139 in Q2FY14, which is a nice drop in costs due to an increase in production coupled with a drop in costs - which is what we've been seeing with many of the miners. But sequentially, compared to Q1FY14, costs actually rose from $1083 to the current $1139 cost per ounce.
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 2013 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 second quarter showed an improvement in costs on a year-over-year comparative basis.
This was good, and continued the trend of miners cutting expenses to improve profitability, but on a sequential basis Newmont's quarter actually showed a rise in costs in terms of core non-tax costs. Core non-tax costs are an important technique in evaluating the true underlying profitability of operations when companies have large swings in tax bills as Newmont has over the last year. In fact Newmont's Q1FY14 taxes were $78 million, while in Q2FY14 they got a $55 million rebate on their taxes - so obviously we can't compare both quarters without some sort of adjustment as it is an apples-to-oranges comparison.
In summary we thought the second quarter was adequate for Newmont in terms of their true all-in costs, as they continued to bring costs down and survive at a much lower gold price. But we do note that gold-equivalent production was down slightly and core non-tax costs were also up on a sequential basis. We'll be better able to evaluate Newmont's quarter as we continue to compare the company's cost to other major miners as they release their earnings over the next few weeks - so investors stay tuned.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.