What It Really Costs To Mine Gold: The Richmont Mines Second Quarter Edition

Aug.29.14 | About: Richmont Mines, (RIC)


Richmont's costs on both a core and a core non-tax basis plummeted in the second quarter to make it one of the lowest cost gold miners.

This drop in costs on a per ounce basis was due to increased production, grades, and tonnage and thus the significant increase in net income.

We don't expect the extraordinary second quarter to be repeated as management's production forecasts for the rest of the year aren't particularly high.


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 Richmont Mines (NYSEMKT:RIC), a Quebec-based junior miner with operating mines and a number of development projects in Canada.

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 Richmont

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.

Click to enlarge

NOTE: All numbers have been converted to US Dollars using the average conversion rate for the second quarter of 1.0905 Canadian dollars per US dollar.

Observations for Investors

Richmont was one of our top picks of 2014 and has not disappointed as its stock has risen around $1.00 per share to over $2.50 year-to-date - an increase of 150% for investors that purchased shares. As we take a look at the all-in costs, investors can see a clearer picture of why the sudden increase - second quarter production was astounding as it increased 50% from first quarter production and costs came down under $1000 per ounce on a core non-tax basis.

The increase in production was seen across the board at all of the company's mines due to improving grades and tonnage, as well as the new production from Monique and near-surface W Zone production. Throw in the fact that this 50% sequential increase in production was only accompanied by a 10% increase in total costs and you have the reason why the company's share price rose 50% in the week AFTER the earnings report.

As investors can see, Richmont's second quarter production numbers puts it at the top of the list of companies in terms of core non-tax costs.


Core Non-tax Costs

Goldcorp (NYSE:GG)

Under $1050 per gold-equivalent ounce

Randgold (NASDAQ:GOLD)

Under $1000 per gold-equivalent ounce

Eldorado Gold (NYSE:EGO)

Under $1000 per gold-equivalent ounce

Newmont Mining (NYSE:NEM)

Under $1150 per gold-equivalent ounce

Agnico-Eagle Mines (NYSE:AEM)

Under $1200 per gold-equivalent ounce

Alamos Gold (NYSE:AGI)

Around $1200 per gold-equivalent ounce

Yamana Gold (NYSE:AUY)

Under $1200 per gold-equivalent ounce

Barrick Gold (NYSE:ABX)

Under $1300 per gold-equivalent ounce

Kinross Gold (NYSE:KGC)

Under $1300 per gold-equivalent ounce

Allied Nevada Gold (NYSEMKT:ANV)

Over $1300 per gold-equivalent ounce

Click to enlarge

Conclusion for Investors

Richmont's share price has certainly reacted to its extraordinary second quarter production and profitability despite a lackluster gold price - this is what happens when a gold company trading at an extremely low valuation (see our earlier article) surprises with improved production. This increased production led to much lower costs on both a core basis and a core non-tax basis, and ultimately the company's net income.

The question investors now need to ask is if the company can continue to keep costs low, and that is a question we're not certain about. What we didn't like about the company's report was the amount of gold forecasted by management for the rest of the year:

With 60% of our 2014 forecasted production realized in the first six months of the year, we are pleased to have recently increased our 2014 gold production guidance to 75,000 to 85,000 ounces from 70,000 to 80,000 ounces previously, and we remain intently focused on continuing to manage our operational efficiency and productivity going forward.

The company has already produced around 48,000 ounces of gold in FY2014, and if the company hits the top end of its forecast of 85,000 ounces of production, that means that in Q3 and Q4 production will average about 19,000 ounces - similar to what we saw in Q1FY14 and that was not a blockbuster quarter. Thus we expect costs to rise in the third and fourth quarters as we probably see core costs around what we saw in the first quarter.

We do stress that we are only discussing production and costs in this article, and to really come up with a valuation for Richmont investors would need to include Richmont's large cash position (over $30 million Canadian dollars), but we don't think we'll see another repeat of the extraordinary second quarter for the rest of the year.

Disclosure: The author is long RIC, 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.