Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
AngloGold Ashanti’s Americas division produced gold at $765 per ounce, almost $100 an ounce less than its operations in South Africa.
Gold is being mined by some of the world’s biggest producers at costs that are higher than the current price of the precious metal, several recent earnings reports have revealed.
But according to Forbes’ columnist Tim Treadgold, the one place where the trend seems to be going the opposite direction is in the U.S.
“In the commodity world the value-gap is best illustrated by that universal material gold, with the cost profile of one company demonstrating why the U.S. is a preferred destination for new mine developments,” he writes.
Gold mined in the Americas is the cheapest.
He takes AngloGold Ashanti’s (NYSE:AU) (JSE:ANG) latest results as an example. The South Africa-based company, one of the world’s biggest gold producers, said Monday its second-quarter net loss shrank to $80 million from $2.17 billion a year earlier partly because of higher gold output.
But once the results were broken down for the miner’s four divisions (South Africa, Continental Africa, Australia and the Americas), it became clear that the Americas unit, which includes Cripple Creek & Victor mine in Colorado, as well as operations in Brazil and Colombia, won the cost race.
According to Bank of America Merrill Lynch, that division produced gold at $765 per ounce, almost $100 an ounce less than AngloGold’s operations in South Africa.
Here comes the AISC
These sorts of analyses are now possible since the industry introduced a new measure that may become a benchmark of industry efficiency for companies and investors: the all-in sustaining costs, or AISC.
For years the market sentiment was that the gold industry’s cost reporting was some sort of a joke. But companies have worked hard to shed that reputation in the past year and a half, making undeniable progress with the institution of the AISC in 2012.
Widely adapted by the sector last year, AISC captures a point-in-time look at what it costs to run a gold mine and generate today’s revenue. That means the measure includes sustaining capital (which gets bigger and bigger as mines get older and grades decline) as well as G&A expenses. It does not include costs such as project capital (which is included in a separate all-in cost measure) or dividends (which are discretionary).
The all-in cash costs reporting metrics have not been without critics. Last month the CEO of Randgold Resources (LON:RRS), Mark Bristow, lashed out against the tool, denouncing AISC as the refuge of companies that were not making any profit. He told Mining Weekly that AISC was just “jiggery-pokery”.
Gold prices were trading modestly higher in early U.S. trading Wednesday. December Comex gold was last up $2.70 at $1,313.30 an ounce. Spot gold was last quoted up $3.40 at $1,312.50.
3 Comments
Mike
South American and South Africa’s mining is very labour intensive because of the very very cheap labour that these mining companies take advantage of. The locals are limited to what work is available so they are forced to take very poor paying mining jobs to feed their families. It’s cheaper, and the politically correct method. These countries are very corrupt with leaders in all area’s on the take, that’s how business is done there. Here in the USA and Canada the corruptness isn’t as visible but rest-a-sure it is. The labour isn’t as cheap so we have the equipment to do the work. I’ve worked in most of these countries and industries and know first hand how the “system’s” work.
kbaus
It is somewhat misleading if one talks efficiency. Cost per oz does not show the full picture on how well a mine is run. It needs as well cost per tone of ore. A mine can be very wasteful but have good grades and cost per ounce comes good. Another mine has lower grade, cost per ounce comes just below the spot yet per tonne could be half of the “good” one. What I am trying to say is, that the investor should know also the cost per tonne so it can realise if some of the profits are not wasted due to wasteful management. Of course celebrate when one can…
Sergio Pastor,Geologist
Sergio
South American mining is labor intensive because of the very expensive nature and
quantity of the equipment to be imported into the country. However, I feel mining companies are modern generation “venture capitalists” not the “Ugly American” of the past. There are some humans who take advantage of the poor, uneducated workers; however, I do see local benefits from mining with respect to the education and training that workers get that enables them to work at any mine once they are trained. The education/training that miners receive is something they do not get from own country. I’ve worked in most of these Latin American countries and I can testify that a mine truck driver there makes almost as much as a “gringo” in Nevada or Canada!! and I know firsthand how the systems works.
You work hard, you get more DOLARES, amigos.