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 real costs of production of Allied Nevada Gold (NYSEMKT:ANV), a junior miner that produces gold and silver in the United States. Its flagship and only producing property is the Hycroft mine located in Winnemucca, Nevada, though the company does own other advanced and early-stage properties in Nevada.
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 historical 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 Allied Nevada Gold
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. 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
As investors can see, Allied Nevada has been struggling to maintain a cost structure that allows the company to be profitable in the current gold price environment. In Q2FY14, the company's core costs (costs excluding derivatives and exceptional items) were $1387 per gold-equivalent ounce, which rose on a sequential and year-over-year basis. This was a stumble for the company, as first-quarter costs were $1271 per gold-equivalent ounce.
In terms of the company's core non-tax costs (costs excluding taxes), Allied Nevada saw its costs also rise in Q2FY14 to $1351 per gold-equivalent ounce. This is above the current gold price, and shows that management is still continuing to get its cost structure under control. The only reason why the company had net profit in the quarter was due to the $20 million sale of its Hasbrouck interest - otherwise, Allied Nevada would have had a net loss for the quarter.
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, Agnico-Eagle Mines (NYSE:AEM) registering core non-tax costs of under $1200 per gold-equivalent ounce, Alamos Gold (NYSE:AGI) registering core non-tax costs of around $1200 per gold-equivalent ounce, Eldorado Gold (NYSE:EGO) registering core non-tax costs of under $1000 per gold-equivalent ounce, and Newmont Mining (NYSE:NEM) registering core non-tax costs of under $1150 per gold-equivalent ounce. As investors can see, Allied Nevada ranks in the higher end of gold miners in terms of its core non-tax costs.
Conclusion for Investors
Management has been struggling to control mining costs in an environment with gold hovering around $1300 per ounce, and the second quarter shows that they haven't gotten a handle on costs yet. In fact, according to management's outlook for the second half of the year, they expect cash costs to continue to rise compared to the first half of the year, as they expect increased stripping to facilitate higher ore access in 2015. If that's true, that may be a positive catalyst for the company in FY2015, but that's a topic for a different piece.
Allied Nevada investors need to monitor the company's liquidity very carefully, as the company has quite a bit of debt (and quarterly interest payments), and it needs to significantly reduce its costs of production or see a higher gold price to service its debt. Of course, if the gold price rises, then this company has a lot of leverage to the gold price, but investors need to be very cautious with their Allied Nevada investment.
Disclosure: The author is long EGO, AGI. 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.