Tuesday, November 26, 2013

"Cash Costs A Better Indicator Of Pressure On Gold Mining: Citi" (GDX; GDXJ)

A subject near and dear, links below.
From Value Walk:
Gold mining operations have been under severe pressure for years, and major companies have burnt through $11 billion in the last decade, but that hasn’t stopped mines from increasing production, raising the gold supply by 10% between 2009 and 2012. Normally you would expect cost pressures to force some mines to halt production, but Citi analyst Jon Bergtheil thinks that cash costs may be a better indicator of short-term pressure than all-in costs.

Gold miners failed to cut costs
“Gold miners have failed to cut costs quickly enough to keep up with the fall in the gold price. Indeed, Citi equity analysts calculate that average all-in costs production costs decreased by 6.1% y/y in H1 2013 to $1,666/oz, while average spot gold prices fell at a faster rate of 7.4% to $1,530/oz. during the same period,” writes Bergtheil. “We estimate that practically the entire global gold industry is cash-burning on an ‘all-in’ cost basis.”
gold all in costs

Gold: All-in cost

All-in costs include everything from CAPEX and exploration costs to taxes, but a lot of the time these costs are overhead that mining operations can’t get out from even if they halt operations. This is the comparison that has a lot of people worried about the industry. Looking only at cash costs, a more reasonable picture emerges.


This doesn’t mean that all-in costs aren’t relevant, and they’re still a good indication of the long-term health of the sector, but cash costs seem to be a better indicator of gold production in the short term. This implies that gold’s spot price will have to keep falling before miners start pulling back on supply, and while Bergtheil doesn’t think gold will fall below $1000/oz, he concedes that it is a possibility. Above ground inventory has also been increasing, meaning that even if miners do reduce production there will be a significant delay before the reduction is able to support prices.

Something unexpected could always send investors back to gold as a defensive measure, but with falling prices and a still increasing supply, it looks like gold’s bear market hasn’t completely played itself out just yet, causing Citi to rate the sector as a whole as neutral.
Nov. 18 
This is what Izzy was warning against in last week's Alphaville post "The gold producer wild card".
Which brought out the dimwits:
Scipio78 | November 14 1:55pm | Permalink
This post is nonsense. The real "all-in cost" of mining gold is about $1100oz for most producers. On new mines (usually in Africa or Latam with little infrastructure and greedy politicians) it can be about $1500-1600oz. For many gold miners current spot prices are about breakeven, if spot were to go below $1k, they would not hedge .... they would close down!! 
It isn't the all-in cost that matters here, companies will forgo capex, environmental remediation and a half-dozen other components of "all-in".
What matters is cash costs. What do they have to pay the miners? What is this month's electrical bill? etc....
Nov. 12 
Sept. 23 
One thing to keep in mind, there are a few measures of 'cost of production'.
As the Financial Times put it a on Monday in "Gold mine measure ‘to reflect true costs’":
Gold is being mined by some of the world’s biggest producers at costs that are higher than the price of the precious metal, according to a new measure that may become a benchmark of industry efficiency for companies and investors.

Several miners reporting earnings in recent weeks have revealed “all-in sustaining costs” of production of more than $1,200 per troy ounce, the price to which gold dropped this year. Some have shown an AISC of more than $1,400. Gold ended last week at $1,314 per ounce, having fallen more than 5 per cent during the week.
The AISC measure intends to show more clearly the full costs of getting gold out of the ground. Its adoption comes as this year’s sharp fall in the price of the precious metal has put the industry under more pressure than it has known for almost a decade and heightened investors’ interest in miners’ true profitability.
Goldminers, like other miners, have traditionally used “cash cost” – showing the cost of running a mine to produce a given amount of a metal – as a benchmark of their operating efficiency.

However cash cost measures have disregarded other expenses, from general office spending to some of the capital that must be spent to develop a mine, to keep it in production or to rehabilitate a site at the end of its life....MORE 
Although the new measurement is closer to reflecting financial reality and thus more honest in reporting, you can bet that some managements will use the cash cost bogey at least for periods up to a year meaning that there will be more supply coming out than if one used the AISC number.
June 26 
April 18