Monday, July 8, 2013

Citibank Analysis of Gold Miners' cost of production. All are >$1,300/ounce.

Zerohedge summarizes a Citibank analysis of 20 top gold miners.  The analysis shows that all 20 have an 'all in cost are over $1,300 per ounce.  And Citibank claims that no miner will generate free cash flow at current spot metal prices.

GoldCorp (GG) is one of my key holdings.  Reading from the chart in Citibank's analysis GG's all in cash cost of production is about $1,550 per ounce.  That's odd.  GG's 10Q report for 1Q13 shows that GG's sustaining cash cost of production is $1,135.  I suspect that the difference lies in 'sustaining cash cost' versus 'all in cost'.  All in cost include capital for new projects and expanding production and I suspect that it includes depreciation expenses as well.  Sustaining cash cost of production, which is not a GAAP metric which most gold miners started reporting this year is cash cost only, no depreciation and only sustaining capital.  Presumably, if GG can cut all exploratory capital they will generate free cash flow if gold sales are above $1,135 per ounce.  

In order to make cash GG could also reduce production at their higher cost mines in addition to cutting capital for new projects.   Mine production cost varies widely.  Two of GG's biggest mines had negative cash cost in 2012 when including the value of the by-products (silver and copper).  And, a couple of GG's mines had gold cash cost over $800 per ounce.

Certainly many gold mines are unprofitable at current gold and silver and copper prices.  Over the last 5-10 years the cost of production for gold has increased almost as fast as the price.  Yet total production volume has remained flat.  Refer to some of my earlier posts for more statistics.  

The strong gold mining companies with low sustaining cash cost will survive the downturn in prices and emerge stronger as their competition folds.  The reduction in supply as high-cost mines are decommissioned, exploration slows, and new projects are moth balled should have quite an impact on gold and silver supply.  This reduction in supply would affect the price in a normal market.  The current markets are anything but normal.

Citibank's report suggests that GG will not be profitable while gold is below $1,550 per ounce.  No wonder valuations for the miners are getting hammered.  Time to brush off my own analysis of GG.  Hopefully, GG will present their own forecast for the rest of 2013 soon, perhaps with their Q2 results.  It will be very interesting to see how drastically GG is cutting back on capital for explorations and new projects. 

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