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 Agnico-Eagle (NYSE:AEM), a mid-tier producer with mines in Canada, Mexico, and Finland. Also, the company is led by Mr. Sean Boyd, one of our personal favorite CEO's in the mining industry.
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 Agnico-Eagle
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, 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.
Observations for Investors
The first thing investors should notice about Agnico-Eagle's performance is that the company has done an excellent job in bringing costs down in terms of its core costs and its core non-tax costs which have both been falling significantly on a year-over-year basis to $1126 and $1067 respectively per gold-equivalent ounce compared to over $1400 from the comparison quarter. Additionally, the costs are also lower compared to FY2012 and FY2013 - which is exactly what investors should be looking for in terms of gold production costs.
Costs were lowered due to a combination of cost-cutting activities as well as production growth as the company is on pace to hit its 1.35 to 1.37 million gold ounce targets - that would be the best year in terms of production in the company's history.
Investors should note that sequentially costs did rise from the spectacular Q1FY14, though we wouldn't be too harsh on this as those costs were extremely low and were probably not sustainable in the long term. But we do want to know why costs rose, and when we dig into the company's report we find that costs seem to have risen primarily due to a drop in production from the first quarter - primarily from the Meadowbank mine where payable gold dropped from 156,000 ounces to 118,000 ounces. That 40,000 ounce drop is a significant drop in production and it seems that the company expects production to continue to drop in the second half of the year - investors should remember this when looking forward to future production numbers.
On a comparative basis, we've only published the analysis from a few other competitors with Goldcorp (NYSE:GG) registering core non-tax costs of under $1050 per gold-equivalent ounce, Yamana Gold (NYSE:AUY) registering core non-tax costs of under $1200 per gold-equivalent ounce, Barrick Gold (NYSE:ABX) registering core non-tax costs of under $1300 per gold-equivalent ounce, and Newmont Mining (NYSE:NEM) registering core non-tax costs of under $1150 per gold-equivalent ounce. Agnico-Eagle's core non-tax costs are excellent compared to its competitors and it is pretty much at the level of our cost leader, Goldcorp - a significant improvement for a company that was a mid-tier cost producer over the last few years.
Conclusion for Investors
In terms of core costs and core non-tax costs, Agnico-Eagle continues to improve and bring costs down to industry leading levels, and this is being done through increasing production numbers as the company is on pace to have its best producing year in its history. We do note that Meadowbank production has been dropping and is forecast to drop further in the second half of the year, but the company did make a splashy (and hopefully successful) acquisition in its joint purchase of the Malartic mine from Osisko Mining, which may represent a good replacement for Meadowbank's production.
Of course production costs alone don't give us an idea of the company's valuation, but in terms of this metric the company has outperformed its competitors as it has joined the top tier of low-cost gold miners.
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.