Commodities & Metals
Rising Gold Production Cost, Very Uneven From Miner To Miner (ABX, NEM, AU, GFI, HMY, GDX, GDXJ, GLD)
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One of the major caveats related to gold mining and gold prices has been the rising cost of production. Higher labor costs, higher energy costs, and lower grade ores have all contributed to boosting costs. The good news has been that rising prices for gold have been at least keeping pace, if not rising faster.
A new report from ABN Amro Bank, VM Group, and Haliburton Mineral Services provides details on rising production costs in the major mining regions of the world. The report is based on cash costs per ounce of production from 111 gold mining companies operating a total of 274 mines. Barrick Gold Corp. (NYSE: ABX) and Newmont Mining Corp. (NYSE: NEM) are among the companies mentioned specifically in the report.
Cash costs include direct mining and processing expenses, other onsite charges, third-party smelting and refining charges, and royalties and taxes net of by-product credits. In the first quarter of 2011, the average cash cost of production rose from $609/ounce to $620/ounce, a boost of 1.8%.
The other side of the coin is that rising costs have not prevented producers from posting record margins. In the first quarter, margins rose from $758/ounce to $767/ounce. In the fourth quarter of 2008, margins stood at $422/ounce. Comparing production of 100,000 ounces in the fourth quarter of 2008 and the first quarter of 2011, miners’ margins are $42 million better. For Barrick Gold, which produced 7.8 million ounces of gold in 2010, that’s a boost in margins of nearly $3.3 billion. Not a bad bounce in just two years.
A weak US dollar has contributed to a rise in global average production costs, but has kept US production costs down to an average of about $546/ounce. In South Africa, which has faced power supply shortages, labor disputes, and other issues, the average cash cost rose to $869/ounce. Some 10% of the country’s gold was produced at a cash cost above $1,200/ounce. And that number could go higher.
Wage negotiations in South Africa have begun between the miners’ union and three producers, AngloGold Ashanti Ltd. (NYSE: AU), Gold Fields Ltd. (NYSE: GFI), and Harmony Gold Mining Co. Ltd. (NYSE: HMY). The union is seeking a pay hike of more than 14%, and has already turned down a counter offer of 4%. Food and energy inflation are rising more rapidly than the official 4.2% inflation rate in South Africa and the country’s miners want the mining companies to share their climbing margins with the workers.
In the past year, Gold Fields and Harmony have posted the best share price gains, with nearly a 10% gain for Gold Fields and about a 25% gain for Harmony. Protracted negotiations or strikes could put a real dent in revenues and earnings. Harmony’s trailing P/E ratio is 55.23, while its forward P/E is just 14.19. Gold Fields’ trailing P/E is 37.49, and Thomson Reuters has no forward P/E estimate. AngloGold’s trailing P/E is a whopping 97.56, while its forward P/E is just 9.30.
Production costs, which are already high, are going to get even higher as the year progresses. In South Africa, where costs are highest, it seems likely that production costs will rise even more. A weak dollar doesn’t help because the lowers the margins on an ounce of gold and raises the cost of energy.
Barrick Gold has no operations in South Africa and its other African mines were spun off last year to a company called African Barrick Gold plc, which trades on the London exchange. Newmont, likewise, has no operations in South Africa, although it does operate two mines in Ghana.
The Market Vectors Gold Miners ETF (NYSE: GDX) holds Barrick, Newmont, AngloGold, and Gold Fields as three of its top ten investments, representing about 35% of the fund’s assets. The fund’s shares are up more than 2% in the early afternoon today, to $55.24, in a 52-week range of $46.80-$64.62. The Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) does not hold any of these large-company shares, and is trading up more than 3.5% today, at $35.20, in a 52-week range of $25.10-$44.86.
The SPDR Gold Trust (NYSE: GLD) is up about 0.3% today, to $151.27, in a 52-week range of $113.08-$153.61. Comex gold futures have risen to a high today of $1,559.30, within reach of the 52-week high set in early May.
Paul Ausick
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