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 it, consider following me (clicking the "Follow" button next to my name).
In this analysis we will calculate the true costs of production of Goldcorp (NYSE:GG), one of the largest gold mining companies in the world. Goldcorp produces gold, silver, copper, lead, and zinc in countries located strictly in North and South America - an overview of their development projects and mines can be found here on their website.
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 Goldcorp
Let us use this methodology to take a look at the company'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 silver-to-gold ratio of approximately 66:1, copper-to-gold ratio of 419:1, lead-to-gold ratio of 1356:1, and a zinc-to-gold ratio of 1371:1. 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 the Table and Goldcorp's Revenues and Costs
In 2013 Goldcorp changed the way that it accounts for its Alumbrera and Pueblo Viejo projects to account for them as joint ventures instead of joint operations. 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.
For our purpose that means that all production from Alumbrera and Pueblo Viejo will not be included in our gold-equivalent calculations (we have removed the gains/losses from these operations as well). Since Alumbrera produces the company's copper production we will also remove this production from the calculations, but we have included "top-line gold" so that investors can get an idea of the all-inclusive gold production for the company.
Finally, the Marigold mine was sold and was classified by Goldcorp as "discontinued operations" and thus we will remove all the revenues, costs, and gold production from the mine in our calculations.
Observations for Investors
Goldcorp's Q4FY13 true all-in costs (costs excluding write-downs) fell on a year-over-year basis from $1524 in Q2FY13 to $1058 in Q4FY13, but since we've had large write-downs in the comparison quarter, 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, Goldcorp's core non-tax costs dropped from $1145 per ounce in Q2FY13 to $1040 in Q2FY14 - a sizable drop on a year-over-year basis and this is consistent with what we've been seeing with many of the other miners. Additionally, Goldcorp also experienced a sequential drop in these core non-tax costs from the previous quarter as they dropped from $1056 to $1040, and since dropping sequential costs is an important thing to see that is another positive for the company.
On a comparative basis, we've only published the analysis from one other competitor (Newmont (NYSE:NEM)), but compared to the fellow major, Goldcorp did extremely well as its costs are below Newmont's costs in each of our cost categories which shows that Goldcorp still has a very cost-effective model compared to the other majors.
The biggest negative that we note is that Goldcorp's production did fall on a sequential basis from 763,000 to 742,000 gold-equivalent ounces. We wouldn't read too much into this since quarterly variations are not uncommon, but it is something to note as it may be a sign of future declines. To be fair to the company though, production is still at a pace to produce at higher levels than in FY2013, but they'll have to increase production in the final two quarters to make the middle of their guidance of 2.95 to 3.1 million ounces in FY2014.
Conclusion for Investors
Goldcorp continued to show that it is one of the lowest cost producers as it continued to lower all costs on both a year-over-year and a sequential basis. We did note that production totals were lower on a sequential basis, but that isn't unusual and we'd be more concerned if we saw this continue into the third quarter (which would also probably lead to lower guidance). Of course all-in costs isn't the sole evaluation criteria for a miner, but on this basis Goldcorp continues to shine.
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.