No respite for gold producers in the southern hemisphere on Tuesday morning…
And no dead cat bounce splat for the gold price.
And to spell out why this is such an issue for the gold miners, we present the following thoughts from Citigroup.
It looks at planned changes to the way gold miners report their production costs per ounce of gold produced — changes intended to address big shortcomings of the traditional “cash cost” measure.
First the backstory. Gold miners, Citi says, are beset with several problem: a track record of over-promising and under-delivering on output; declining quality of new discoveries; and rising cost pressures.
The analysts go on to say (our emphasis):
Compounding the above factors is belated acknowledgement of recognized deficiencies around benchmark cash costs, which have historically provided a comical representation of expected free cash flows.
In conjunction with investor frustration, the other primary catalyst for moving to a more accurate representation of cash profitability has been properly informing government. In this regard members of the World Gold Council are formulating a revised industry standard. A formal definition is expected to be agreed upon and released around mid 2013, with the general aim to provide an accurate “cash flow” type measure rather than the previous “P&L” style disclosure.
Several companies have already proactively adopted a preliminary measure including Newmont (also a World Gold Council member) which began reporting costs on an “all-in sustaining” basis in 2012.
And now the punchline.
Under “all-in sustaining” costs, Newmont’s 2012 cost of production was US$1,149/oz, 70% higher than the prior “cost applicable to sales” disclosure of US$677/oz. While in theory, these additional cost elements should be incorporated into estimates anyway, in our view, opaque disclosure and individual materiality of these factors has meant they are often underestimated or overlooked.
Now, if Newmont (a very big company remember) is making a couple of hundred dollars per ounce, what does that mean for the juniors?
Over to Citi again:
Once the World Gold Council tables the new framework, we anticipate ASX gold producers will move quickly to adopt this new approach. As such, many costs will become much more “visible” and hence we caution investors that disclosures from some producers may disappoint. We flag this as something to watch over the course of 2013 – not just for the gold sector but also for miners more broadly as we know non-precious metal producers are also closely watching this development.
Related links:
Spotted, the once in a 2 million year ‘Golden Swan’? – FT Alphaville
Rout pitches gold into bear embrace – FT.com