While the broad based U.S. stock market indexes are hovering around the flat-line in 2016, mining stocks have been on an absolute tear. The average silver miner has more than doubled year-to-date, whereas 17 of 29 gold miners with a market valuation in excess of $200 million have at least doubled in value. In fact, out of 39 qualifying miners (silver included) with a valuation above $200 million, just one is up less than 49% year-to-date! Sorry Primero Mining shareholders.
Mining stocks have had such an incredible run this year thanks to the combination of rising underlying commodity prices and shrinking operating costs.
Higher gold and silver prices have been fueled by a number of factors. Economic uncertainty is often a reason why investors flock to metals, and with U.S. GDP coming in at just 0.5% in the first quarter, and China's GDP growth slowing, there's enough uncertainty to be cut with a knife. Additional factors influencing metal prices include increased demand from central banks for gold and growing demand for silver from the solar industry, as well as a persistent low-yield environment which is reducing the opportunity cost of investing in gold or silver as opposed to an interest-bearing asset such as a Treasury bond.
However, the cost side of the equation has witnessed some big improvements over the past three years. After a decade-plus of rising gold prices, miners were expanding their operations almost without giving heed to cost earlier this decade. However, with gold prices dropping off more than $800 an ounce from their highs at one point, many miners paid the price for their ignorance. Now, with a renewed focus on quality mining rather than quantity, we're witnessing a rebirth of profits within the industry.
Image source: Sibanye Gold.
The importance of all-in sustaining costs
One of the most universally accepted and transparent measures of mining efficiency is the all-in sustaining cost, or AISC, which was introduced by the World Gold Council. What makes the AISC such a valuable measurement for investors is that it provides a good look at what the true costs are to maintain pertinent operations. AISC includes all of the adjusted operating costs you'd expect:
- On-site mining costs
- On-site general and administrative costs
- Royalties and production taxes
- Realized gains/losses on hedges due to operating costs
- Community costs related to current operations
- Permitting costs related to current operations
- Third-party smelting, refining, and transport costs
- Non-cash remuneration
- Stockpiles and inventory write down
- Operational stripping costs
- Byproduct credits
But, it also includes:
- Corporate general and administrative costs (including share-based remuneration)
- Reclamation and remediation
- Sustaining exploration and study costs
- Sustaining capital exploration costs
- Sustaining capitalized stripping and underground mine development
- Sustaining capital expenditures
This broad array of costs gives investors an arguably transparent and comparable look at how a miner is performing relative to its peers. It's admittedly not perfect, as it doesn't address the discretionary nature of capital expenditures or necessarily make it easy for investors to understand the difference between sustaining and non-sustaining capital expenditures. But it's a pretty important tool that can help investors weed out the lowest-cost gold miners from scraping the bottom of the pan.
Can you guess which gold miner has the lowest AISC?
"Which gold miners offer the lowest AISC," you wonder? I wondered this as well, which is why I examined 10 of the 13 largest gold stocks' full-year AISC outlook based on their most recently reported quarter. Note, Royal Gold and Franco-Nevada were excluded since they're royalty streaming companies and have a completely different cost model. Additionally, African miner Randgold Resources was left out as it reports in all-in cash costs instead of AISC, and I'm trying to keep this as apples-to-apples as possible.
Based on their latest quarterly reports, and as sorted by the midpoint of their full-year AISC guidance, here are the best (and worst) of the largest publicly traded gold miners by market cap when it comes to cost efficiency. All figures are on a per ounce basis.
- Barrick Gold (B 1.69%): $760-$810
- Yamana Gold: $845 (based on co-product AISC)
- Agnico Eagle Mines: $850-$890
- Sibanye Gold: $880
- Eldorado Gold: $886 (based on Q1 results)
- Goldcorp: $850-$925
- Newmont Mining (NEM 1.48%): $880-$940
- AngloGold Ashanti (AU): $900-$960
- Kinross Gold: $890-$990
- Gold Fields (GFI 1.17%): $1,000-$1,010
One trend that tends to stand out is that in spite of substantial cost-cutting efforts by African miners, they still face cost disadvantages compared to miners primarily operating in the Americas. The potential for political disruptions and labor disputes tends to be more prevalent with African-based miners such as Gold Fields and AngloGold Ashanti more so than any other miners on this list. To be fair, Gold Fields and AngloGold also operate mines outside of Africa, too, but the drag felt from external pressures is clearly something investors considering these two miners should remain aware of.
Image source: Gold Fields.
Secondly, you'll note that bigger isn't always better. Newmont Mining is one of the world's largest gold producers, and it's expecting to generate between 4.5 million gold equivalent ounces (GEO) and 5 million GEO in 2016. However, Newmont's size and unbridled expansion earlier in the decade also led to a handful of asset write downs, including the $1.61 billion write down of its Hope Bay project in Canada in the fourth quarter of 2011, and a $1.77 billion write down in 2013 pertaining to two Australian mines and stockpiled bullion. Newmont has made strides in reducing its AISC, but it still has some work to do, even with gold safely $200+ an ounce higher than where it was back in January.
Why Barrick Gold is the cream of the crop
But when it comes to the lowest AISC, that title belongs to Barrick Gold with a midpoint AISC of $785 in 2016. In fact, Barrick reduced its AISC by $15 on the top- and bottom-end of its forecast in Q1 following better-than-expected results.
Image source: Barrick Gold.
What's worked for Barrick? To begin with, the company has sold off non-core assets in order to reduce its leverage and distance itself from similar sized asset write downs that it was forced to undertake around the same time as Newmont Mining. In 2015, Barrick Gold had set a goal of reducing debt by $3 billion. With the completion of the sale of its 100% interest in the Bald Mountain mine and 50% interest in the Round Mountain mine in Nevada to Kinross Gold in January 2016, the company had successfully achieved more than $3 billion in debt reductions.
Furthermore, during Q1 Barrick announced it was on track for a cumulative $2 billion in debt reductions this year. It's worth noting that of the $9.1 billion in debt remaining on Barrick Gold's balance sheet, less than $200 million is due before 2018, with approximately $5 billion of its $9.1 billion not due for at least another 16 years. Long story short, it's made big strides in improving financial flexibility and its intermediate goal is to get its debt under $5 billion.
Also working in Barrick Gold's favor has been a reduction in overhead costs and capital expenditures. With gold prices dropping steadily between 2012 and 2015, gold miners like Barrick Gold were left with the tough choice of deciding which projects merited development. Many chose to focus on existing mines, even paring back expenditures to all but the highest grade mines. Barrick Gold was no exception. In 2016, Barrick anticipates spending between $1.35 billion and $1.55 billion in capital expenditures (which is actually lower on the high-end from its prior forecast three months earlier). This compares with its 2012 forecast (from its Q4 2011 report) of between $2.6 billion and $2.75 billion in capex spending.
Barrick is being much smarter about where it chooses to deploy its cash, which more than likely is going to result in substantially higher EBIDTA in 2016 and beyond. Investors looking to take advantage of rebounding gold prices have a lot of options, but I would strongly encourage them to give Barrick Gold a closer look.
