An Analysis On The All-In Sustaining Cash Cost Of Gold Mines

by: Katchum

In June 2013, the World Gold Council (WGC) published a guidance note on the all-in sustaining cash cost metric for gold mining companies (NYSEARCA:GDX). This way, investors can have a better evaluation on the real cost of mining gold. This metric adds additional costs, which reflect the varying costs of producing gold over the life-cycle of a mine. To name a few: by-product cash costs, sustaining capital, corporate general and administrative expenses, and exploration costs. We calculate all-in sustaining costs as the sum of total cash costs (net of byproduct credits), sustaining capital expense, corporate, general and administrative expense (net of stock option expense) and exploration expense.

There is one flaw in this system though. These all-in costs only include additional all-in sustaining costs and do not include CAPEX for projects. If we would include these project costs, we would get an astounding $1784/ounce in 2012 for the bigger gold mining companies. Nevertheless, it's a first step in the right direction.

It is interesting to analyze how the all-in sustaining cash costs have progressed in 2013 as compared to 2012. All-in cost data has been taken from a research report of Dundee Capital Markets for the 2012 estimate.

We see here that many gold miners are producing just under the average gold price of $1600/ounce in 2012. The gold mine with the best numbers seems to be Alamos Gold (NYSE:AGI).

Now we fast-forward to 2013, take data from a recent Denver Gold luncheon for the 2013 AISC cost estimate.

Again we see that the all-in sustaining costs are hanging just below the current average gold price of $1300/ounce in 2013. Yamana Gold (NYSE:AUY) seems to do best here.

Now let's compare these numbers year over year.

Chart 3: YoY AISC

We can immediately see that the costs have come down from around $1300/ounce to $1000/ounce. Mainly because budgets have been cut, mines have been closed, labor costs have been reduced. So the gold miners are reacting to the lower gold price.

The question is, have they done a good job on this? If we compare the margin of AISC to the gold price, we get the following picture.

Chart 4: Margin AISC to Gold Price

Chart 4 tells us that the margins have increased for most miners, which should be a positive light on the earnings of gold miners. Spending cuts have basically improved margins so that many gold mines are still profitable at a lower gold price. Yamana Gold has the biggest improvement in margins.

The following question arises then: "Do these spending cuts have an effect on mine production?"

Let's look at the most recent quarterly report of the world's top three gold miners - Barrick Gold (NYSE:ABX), Newmont Mining (NYSE:NEM) and AngloGold Ashanti (NYSE:AU). All reported higher production. The reason for this is that gold miners are targeting high-grade mines to increase production. This way they can keep getting a high revenue number at a lower gold price.

Of course this cannot last forever, as high grade gold mines will eventually be depleted. It is estimated that we still have to wait till 2015 to see a real drop in supply resulting from the depletion of these high grade gold mines. The only way to see a bounce in the gold price and the gold mines is to look at the demand side. Catalysts for a higher demand are the U.S. debt problem, inflation and Chinese physical gold demand. If demand starts to increase we will see support in the gold price. Otherwise we will have to wait till 2015 when the supply starts contracting.

In the meantime, I advise investors to look at the gold mines that have the lowest AISC, like Yamana Gold. Because when the gold price continues its decline, only those with the lowest costs can survive when the supply contraction starts.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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