How top gold producers margins are being squeezed

In 2014, nine out of top 10 gold producers achieved a significant reduction in all-in sustaining production costs, but the average cash margin fell victim to the bearish gold market.

Since the World Gold Council (WGC) published a Guidance on “all-in sustaining costs” (AISC)* in June 2013, which introduced transparent production cost estimation metrics intended to be used commonly by the global gold industry, most of leading publicly-trading gold producing companies successfully adopted WGC recommendations and implemented AISC to their official reports.

After two years of continuous AISC reporting, it is become possible to compare accurately the top publicly-traded and non state-owned gold mining companies in terms of their production cost.

According to my preliminary estimates based on companies’ data, Russia-based Polyus Gold International (LON: PGIL) was the lowest-cost gold producer in 2014 calendar year with AISC of 825 USD/oz, followed by Australia’s Newcrest Mining Limited (ASX:NCM), achieved roughly 854 USD/oz and Canada’s Barrick Gold Corp. (TSE:ABX) with AISC equals to 864 USD/oz (Figure 1).

Figure 1. Provisional AISC by the top 10 gold producers in 2014, USD/oz (estimation based on data retrieved from corporate reports).

Three Canada’s based companies, Goldcorp Inc. (TSE:G), Agnico Eagle Mines Ltd (TSE:AEM) and Kinross Gold Corporation (TSE:K) are very close to each other by AISC.

With AISC of 1002 USD/oz, Newmont Mining Corporation (NYSE:NEM) holds seventh place.

AngloGold Ashanti Limited (NYSE:AU), Gold Fields Limited (NYSE:GFI) and Sibanye Gold Limited (JSE: SGL & NYSE: SBGL) ranked eighth, ninth and tenth, respectively. High-cost South African deep underground gold mines, comprising assets portfolio of each of three companies, contributed to overall relatively high corporate AISC.

In terms of AISC reduction, nine out of top 10 companies achieved considerable improvements in 2014/2013.

Polyus Gold, being the lowest-cost gold producer in top 10, is the leader in terms of AISC reduction, also. In 2014, Polyus’ AISC improved by 18% to 2013, mainly because of the Russian rouble devaluation, lower sustaining capital expenditures and implementation of the cost optimization strategy (Figure 2).

AngloGold Ashanti, the second best cost performer, improved its AISC by 13% in 2014, by reducing direct operating costs, corporate overheads, exploration expenses and Capex.

Figure 2. Provisional AISC improvements by top 10 gold producers in 2014/2013, % (estimation based on data retrieved from corporate reports).

Gold Fields, third in AISC performance ranking, reduced costs by 12%, because of rigorous cost-control undertakings and disposal of non-core assets.

Sitting fourth, Newmont managed to reduce AISC by 10% in 2014, due to the strong operational performance and lower sustaining Capex.

Kinross, fifth in this ranking, improved AISC by 9%, primarily due to reductions in sustaining Capex and exploration, as well as business development expenditures.

Barrick, the biggest gold producer in top 10, ranks ninth in terms of AISC reduction.

Agnico Eagle achieved 11% reduction in total cash costs (on a co-product basis), but showed no improvements in AISC, which is the basis of comparison. This is the reason Agnico Eagle sits tenth in this ranking.

Despite companies’ best efforts and overall positive improvements in corporate AISC, weighted average cash margin for top 10 gold producers did not keep up with declining gold prices in 2014/2013 (Figure 3).

In 2014, weighted average cash margin for top 10 gold producers amounted to about 313 USD/oz, which is 15% lower than in 2013 (367 USD/oz) as the average LBMA gold price declined from $1,411 to $1,266.

Keeping in mind that costs reduction and production improvements are, usually, longer-term processes, 2015 is definitely going to be an indicative year for demonstration of how successful gold mining leaders in AISC performance.

*All-in sustaining cost is a measure that captures direct operating costs, corporate and exploration expenditure and capital investment required to sustain the business.