Cash Costs: Handy Metric for Evaluating Investment Potential of Gold Miners

by: RD Gupta

There are hundreds of small cap gold miners listed on US exchanges but only a handful that are actually producing meaningful amounts of gold. For the ones that are producing, an interesting metric to look at is the "Cash Cost" of an ounce of mined gold.

Cash costs, in mining lingo, is the cost of production at a site per unit of output. Cash costs include operational cash costs at site level. This includes things like transport, refining , administrative costs and royalties.

The value of the by-products is deducted from the final cash cost of the metal. For example, if a gold mine produces copper as a by-product, then the value of the copper produced will be deducted from the cash cost of the gold. This is the usual accounting treatment for by-products in most industries. Taking a somewhat random sample of producing small cap miners on various exchanges we see that the cash cost ranges from the low $300 range all the way up to $665. Minefinders (MFN) and Capital Gold (OTCPK:CGLD) both are executing well in reducing mining costs, but an investor should not look solely at this metric when making a decision. The key for small cap companies is whether they can keep cash costs under control as they bring new mines online and scale the business.

Company Exchange Market Cap (US$ MM) Cash (US$MM) Debt (US$MM) Cash Cost 2010-2011E
Minefinders (MFN) AMEX $710 $21 $125 $322
Capital Gold (OTCPK:CGLD) NDAQ $187 $7 $9 $330
Romarco Minerals (NYSE:R) TSX $646 $20 $2 $395
New Gold (NYSEMKT:NGD) AMEX $1,500 $137 $170 $407
Great Basin (NYSEMKT:GBG) AMEX $647 $140 $65 $432
Alamos Gold (NYSE:AGI) TSX $1,382 $119 $1 $442
Allied Nevada (NYSEMKT:ANV) AMEX $1,180 $23 $9 $455
Northgate Min. (NXG) AMEX $961 $88 $56 $508
B2Gold (NYSE:BTO) TSX $377 $47 $0 $511
Aurizon Mines (AZK) AMEX $775 $56 $22 $547
Gammon Gold (GRS) NYSE $1,442 $25 $49 $564
Wesdome Gold (WDO) TSX $233 $8 $12 $611
Claude Resources (NYSEMKT:CGR) AMEX $131 $0 $22 $650
Alexis Minerals (NYSE:AMC) TSX $78 $12 $1 $665
Source: 2009 Company Filings
Canadian Dollars converted to US Dollars price as of 1/6/09 date

Disclosure: No positions