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Summary

  • Gold Fields' costs on a core and a core non-tax basis continue to fall on a year-over year basis.
  • Compared to the first quarter, Gold Fields' core and core non-tax costs have risen and the quarter's profit was significantly boosted by the sale of existing gold.
  • Remediation efforts at South Deep should continue through the third and fourth quarters so all-in costs could continue to rise.
  • The company has been talking about significantly reducing its debt which would be beneficial on an all-in costs basis and would improve liquidity.

Introduction

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 Gold Fields Limited (NYSE:GFI), one of the world's major gold producers. The company owns operating mines in Australia, Africa, and South America.

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 Gold Fields

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. 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 price for Q2FY14, which results in a copper-to-gold ratio of 418:1.

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.

(click to enlarge)

Important Notes about True All-in Costs Table for Gold Fields

The top-line gold production number includes gold-equivalents produced at Cerro Corona (gold plus copper), but since we want the strict gold production without copper-byproducts, we have to remove the copper to get to our standard gold production. That is the difference between the top-line gold number and the straight gold production total.

Observations for Investors

As investors can see, Gold Fields has been working hard to reduce core costs (costs including taxes) and successfully reduced these costs from the totals experienced in FY2012 and FY2013. On a year-over-year basis costs also dropped from $1476 in Q2FY13 to the $1317 experienced in the current quarter, though the company's core costs did rise on a sequential basis from $1254 in Q1FY14.

Investors may wonder how the company made a $20 million dollar profit if core costs were $1317 per gold-equivalent ounce - which was slightly above the average gold price in the second quarter (the average London Gold Fix price was around $1289 in the quarter). The answer lies in the amount of gold sold versus the amount of gold produced. Gold Fields produced slightly under 550,000 gold-equivalent ounces in the quarter, yet sold 586,000 ounces in the quarter - a major difference in production versus sales. This is one of the major differences between our methodology which uses gold ounces produced, versus the standard WGC all-in costs methodology (that most miners take from) which uses gold ounces sold. Another reason why we believe our methodology is much better for investors as gold production is probably a bit more important for determining all-in costs per ounce than gold sold.

In terms of core non-tax costs (costs excluding taxes) they also saw the same pattern as they fell on a year-over-year basis (which is good), but rose on a sequential basis from $1188 to $1259 per gold-equivalent ounce (which isn't good).

As investors can see, Gold Fields' second quarter production numbers puts it at the higher end of the list of companies in terms of core non-tax costs, though we do emphasize that they've improved significantly in the last couple of years.

Company

Core Non-tax Costs

Goldcorp (NYSE:GG)

Under $1050 per gold-equivalent ounce

Randgold (NASDAQ:GOLD)

Under $1000 per gold-equivalent ounce

Richmont Mines (NYSEMKT:RIC)

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

Conclusion for Investors

Gold Fields' second quarter saw its costs rise on a sequential basis on both a core and core non-tax basis ($1317 and $1259 respectively) to slightly higher than the quarterly gold price average. This was a significant improvement for the company over the last two years, but it also shows that Gold Fields is merely treading water at current gold prices - like so many other miners.

One thing we didn't discuss above was the cut in South Deep operations due to the fatal accidents that were experienced at the mine and the subsequent remediation to increase safety standards. According to the company, this led to an 8,000 ounce drop in quarterly production on a sequential basis. We wouldn't be surprised to see core costs continue to rise in the third quarter as the costs of the remediation process add up and we could continue to see South Deep production drop as well, though management does expect that normal production will resume in December - it is something Gold Fields' investors should pay close attention to and monitor as South Deep is a major part of the company's future production increases.

Additionally, we do like the fact that the company has been talking about aggressively cutting its debt to 1.0 times earnings before interest, taxes, depreciation and amortization (EBITDA). This would be a positive because not only would it increase the company's financial flexibility, but it would also lower the core costs (we do include financing in core costs) and increase the amount of money that ultimately goes back to shareholders. That is because mining companies tend to pay higher levels of interest than standard companies (the yield on Gold Fields $1 billion debt due in 2020 is around 7%), and thus we think it is a very good move for the company to pay down its debt and investors should also applaud these efforts.