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 Randgold Resources Limited (NASDAQ:GOLD), an African focused miner with operations in Mali, Senegal, the Ivory Coast, and a development project in the Congo. As an African operator Randgold faces significant country risk, but so far management has managed to negotiate these risks smoothly, but investors should pay close attention to political issues in Africa (especially Mali) but this is beyond the scope of this article.
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 Randgold Resources
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.
Important Notes about True All-in Costs Table
Randgold changed the way it does it accounting as of Q1FY13 to account for the Kibali and Morila mines 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 and not including their costs as expenses on the company's income statement - thus we have to remove their attributable production from Randgold's total.
That is the difference between "Top-line Gold Production" (which includes Kibali and Morila) and the "Gold ozs" in the table above.
Observations for Investors
As investors can see, Randgold has always done a good job of managing costs per ounce and Q2FY14 was no exception to this rule as core costs (costs including taxes) were $1070 per ounce compared to $1124 in the second quarter of last year - a nice drop in costs that was primarily due to increased production.
Additionally, core non-tax costs (costs excluding taxes) also fell on a year-over-year basis from $1088 to $954 per gold ounce, though they did rise slightly on a sequential basis from the $939 seen in Q1FY14.
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, Randgold joins Eldorado Gold at the top of our table of the lowest second quarter producers - a significant accomplishment and something that should cheer investors.
Conclusion for Investors
Randgold has always been one of the lowest cost producers in our research and the second quarter of 2014 was no exception to that as both core costs ($1070 per ounce) and core non-tax costs ($954 per ounce) were amongst the lowest cost producers. Additionally, the company grew both its top-line (inclusive of Morila and Kibali) and its directly attributable production (non joint equity accounting production) on a year-over-year basis and its directly attributable production on a sequential basis.
We can't complain at all in terms of the cost structure of Randgold, but one thing that investors should monitor is the current Ebola panic in central Africa as it may or may not be a significant event for the company. If this deadly disease continues to spread to Mali then we could see work operations limited or even halted, though the company's low cost structure and clean balance sheet gives it plenty of financial flexibility to weather the storm. We hope this worry about the Ebola scare is unfounded and the disease's spread is quickly stopped or an accessible cure is found, but as investors it is certainly something worth monitoring.
Disclosure: The author is long GOLD.
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.