Source: Reuters – New rules pressure gold miners to come clean on costs
The gold industry has released new guidelines for bullion miners under pressure to disclose the real economics of producing an ounce of metal, feeding a debate over the sustainability of many gold mines in a sector battered by falling prices.
Miners have seen gold prices soar since the turn of the millennium. At their height in 2011, prices were more than six times the level a decade earlier.
But costs like wages, taxes and electricity have all climbed, sometimes faster than the gold price.
The effect has been that a price drop since April – the sharpest in a generation – has pushed many mines into the red and miners to the verge of reserve writedowns.
The World Gold Council said its new guidelines would help clarify the real cost, beyond cash costs which account for only a portion of what goes into producing an ounce.
“The signal (the new cost reporting will send) is that the gold industry is probably not sustainable at its current level of output,” Nick Holland, chief executive of Gold Fields, said.
“We are going to see more projects deferred, possibly marginal mines being put on care and maintenance or just shut altogether prematurely. And that’s going to change the whole supply and demand fundamentals for the gold industry.”
Gold equities have been battered as prices fall, with the Thomson Reuters Global Gold Index down almost 50 percent so far this year – in part, investors say, due to opaque costs.
“Investors cannot understand the cost structure, so they move out of the sector, rather than take a risk,” said fund manager Angelos Damaskos of Junior Gold.
Methods used by gold companies to report the cost of production often lack consistency.
Most use “cash costs”, based on a standard developed by the now defunct Gold Institute, but with significant variations – like whether or not to include credits for by-products, certain taxes, capital costs and other items.
Top producer Barrick Gold Corp, for example, has historically reported total cash costs and net cash costs, while the world’s second largest producer, Newmont Mining Corp , reported costs applicable to sales.
The metrics can include a credit for some by-products, but not others.
In its guidelines, the World Gold Council listed elements to be included in two measures – “all-in sustaining costs”, or the effective day-to-day cost, and “all-in costs”, which adds in extra costs to reflect variations over the lifecycle of a mine.
Companies are not obliged to use the metrics – which exist on top of normal accounting standards – but many producers have already adopted very similar measures and more are likely to follow suit, driven by pressure from investors like BlackRock who say miners need to report more accurately.
“What we want to do with this methodology is lay out an approach that we hope will provide greater consistency,” said Terry Heymann, director for responsible gold at the WGC.
“All-in sustaining” costs including everything from mining costs to royalties, permitting and exploration to sustain production. “All-in” costs add in elements like broader community and permitting costs.
Part of the issue for gold producers in recent years has been the disconnect between a record prices and lacklustre share prices.
While costs rose across the wider mining industry, gold miners were hit harder, in part as average grades fell.
Average grades in 2002 of 2.8 grammes per tonne had tumbled to 1.2 g/t in 2011, meaning that for every tonne of rock moved, the amount of gold contained within has more than halved.
With most rich projects in traditional mining districts gone, miners were also pushed to expand capacity into lower-grade deposits and tougher geographies just to keep production flat, which was fine so long as gold prices kept rising.
But as gold prices tapered off, many new projects started to look very marginal.
That has left major gold miners in a bind, with their true cost of production hovering around $1,100 to $1,200 an ounce and sometimes higher – uncomfortably close to the spot price, which plunged to a 3-year low at $1,221 on Wednesday.
“With a rising gold price, you can cover up a lot of sins,” said Graham Shuttleworth, chief financial officer of FTSE 100 miner Randgold, which has outperformed rivals.
Shuttleworth, like many peers, said measuring return on investment was paramount in his own decision-making – not costs alone – but recognised investor demand for more.
“From an investor point of view I can see this is better than nothing. I am just cautioning that on its own it is not a magic solution…I would caution that to try and simplify it down to one measure and think this will solve the industry’s problems is a little naïve.”
The World Gold Council hopes the measures will help, for example, with negotiations with governments which have assumed modest cash costs and a high prices mean huge profits.
But, as Shuttleworth and others have said, even better cost measures are not a panacea. Companies can bring down headline costs by cutting exploration, for example – with consequences.
“That’s not really lowering costs, that’s just spending less,” said analyst Elizabeth Collins at Morningstar. “It just means future production will ultimately suffer.“