After a bull market for gold that lasted for more than a decade, the music has now stopped and, during 2013, the price of gold registered its first annual loss in 12 years. Indeed, back during December of last year the price of gold fell below $1,200 per ounce, wiping out two years of gains and returning to a level not seen since 2010. Unfortunately, this is piling yet more pressure on gold miners, such as Barrick Gold (NYSE:GOLD), Goldcorp (NYSE:GG) and Newmont Mining (NYSE:NEM), all of which have been grappling to rapidly reduce costs during the past year or so as the price of gold plummets closer to the cost of production.
In particular, at some points last year it was estimated that about 25% of 67 gold-producing companies, representing roughly 44% of worldwide gold output, were losing money on a cash-flow basis.
This has already resulted in deep cost-cutting throughout the gold industry. However, the question remains: How much further can these cost cuts go? To find out, I have been digging through the numbers Barrick Gold, Goldcorp and Newmont.
Now, in theory, each gold mine has its own production costs; some are higher and some are lower, depending of course on things like the quality of reserves and location of the mine. These tend to be completely different from the company's average all-in sustaining cost of production. So, as the price of gold continues to decline, it is likely that gold miners will start to mothball expensive mines. Based on that theory, I have analyzed the mine portfolios of these three companies in an attempt to establish what production costs would look like if high-cost mines were shut down.
African Barrick Gold
Where will these cuts come? Well, for Barrick Gold it is obvious: African Barrick Gold.
Barrick Gold has a 73.9% equity share in African Barrick, which for the first nine months of this year contributed 352 ounces of gold, or roughly 6%, to Barrick's overall production. Unfortunately, African Barrick's all-in sustaining cash cost of production for the period was $1,429 per ounce, nearly double the AISC per ounce of gold produced at Barrick's South and North American operations.
Overall, Barrick Gold reported an AISC of $919 per ounce of gold produced during the first nine months of this year. However, according to my calculations, if we exclude African Barrick Gold's relatively expensive gold, Barrick's AISC drops to around $850 per ounce. So, perhaps Barrick's share of African Barrick Gold could be for the chop.
Actually, there is already talk of this happening within the next 12 to 18 months. In particular, back in September, CEO Brad Gordon stated that Barrick Gold had signaled interest in exiting its 74% stake in African Barrick, but not at the current share price.
Producing gold at a loss
Meanwhile, Goldcorp's most expensive mine is called Marigold. It produced 25,200 ounces of gold during the third quarter at an AISC of $1,476. This indicates that Goldcorp is losing in the region of $200 per ounce of gold produced from this mine at current prices.
Nonetheless, Marigold is not Goldcorp's only high-cost mine. Indeed, the company's Wharf mine produced 16,700 ounces of gold during the period for an average AISC of $1,204 per ounce.
All in all, according to Goldcorp's fiscal third quarter 10Q filing, the company produced around 637,000 ounces of gold during the quarter at an AISC of $992, a low price, but not as low as that of Barrick. Still, if we strip out the company's most expensive Marigold mine, we get an AISC of approximately $848 per ounce for the period -- a much stronger figure. So, it would make sense for Goldcorp to close its Marigold mine; it seems silly to be operating a mine that is making a loss on every ounce of gold produced.
Luckily, for the most part Newmont's mines are low-cost. For example, across the company's mine portfolio, from North America to Australia, the highest AISC is in South America, where the AISC came in at $1,098 for the fiscal third quarter. All in all, Newmont's AISC for the third quarter was $987 per ounce. However, if we strip out the high-cost South American mines we get an AISC figure of $900 per ounce.
So all in all, it would appear that there is still fat to be cut in the gold mining industry, and these three miners will all become more efficient if they do. Specifically, in the case of Barrick and Goldcorp, cutting their more inefficient operations will result in their average AISC dropping below $900 per ounce; this would be a great decision, and investors would see profits return to levels not seen since 2011.