What It Really Costs To Mine Gold: The First Quarter Allied Nevada Gold Edition

Calculating the True Mining Cost of Gold – Our Methodology

In the previously mentioned article, we gave a thorough overview of the current way mining companies report their costs of production and why it is inaccurate and significantly underestimates total costs. Then we presented a more accurate methodology for investors to use to calculate the true costs of mining gold or silver. Please refer to that article for the details explaining this methodology, which is an important concept for all precious metals investors to understand.

Explanation of Our Metrics

Cost Per Gold-Equivalent Ounce is the costs incurred for every payable gold-equivalent ounce. It is Revenues minus Net Income, which will give an investor total costs. We use payable gold and not produced gold, because payable gold is the gold that the miner actually keeps and is more reflective of production. Miners also use payable gold and not produced gold when calculating cash costs, so this is pretty standard.

We then add Derivative Gains (or minus Derivative Losses), which will give investors total costs without the effects of derivatives. Finally, we add Foreign Exchange Gains (or minus Foreign Exchange Losses) to remove the effects of foreign exchange on the company’s costs.

Cost Per Gold-Equivalent Ounce Excluding Write-downs is the above-mentioned “Cost per gold-equivalent ounce” minus Property/Investment Write-downs and Asset Sales. This provides investors with a metric that removes exceptional gains or losses due to write-downs and asset sales.

Cost Per Gold-Equivalent Ounce Excluding Write-downs and Adding Smelting and Refining Costs is the above-mentioned “cost per gold-equivalent ounce excluding write-downs” adding in smelting, refining and all other necessary pre-revenue costs. This is a new metric that we are now introducing to our true all-in cost series because it will more accurately measure all-in costs and allow comparisons between miners.

Most investors are unaware that many miners will remove smelting, refining and other costs before reporting their total revenues figures and these pre-revenue costs are not reported in the income statement. The result of this is that it skews all-in costs higher for miners that refine themselves or include the costs in their income statement, while inaccurately showing lower costs for miners that remove it before reporting revenues.

A simple test can be done on any miner to see if there are any pre-revenue costs that are not reported in the income statement. Simply take payable production and multiply it by average realized sales price and this should come relatively close to the total revenues figure. If it gives you a number much higher than reported revenues then there are pre-revenue costs that are not being reported.

This line should alleviate these issues and allow comparisons on a fair basis.

Real Costs of Production for ANV – 1Q13 and FY2012

Let us now use this methodology to take a look at ANV‘s results and come up with their average cost figures. When applying the methodology for the most recent quarter and FY2012, we standardized the equivalent ounce conversion to use the average LBMA price for Q4FY12. This results in a gold-to-silver ratio of 53:1. We like to be precise, but minor changes in these ratios have little impact on the total average price – investors can use whatever ratios they feel most appropriately represent the by-product conversion.

Observations for ANV Investors

True Cost Figures – ANV‘s true all-in costs for Q1FY13 were $971 per gold-equivalent ounce, which was higher on a year-over-year basis, but that was to be expected since last year’s first quarter’s costs were exceptionally low. Compared to FY2012 costs, $971 was a marked improvement, though the same thing happened last year with Q1FY11 costs being significantly lower than the full year costs – so we would want to see another quarter with similar performance before we expect FY13 costs to drop.

Compared to competitors, ANV performed very well in comparison to other competitors such as Yamana Gold (AUY) (costs just over $1300), Goldcorp (GG) (costs just under $1200), Silvercrest Mines (SVLC) (costs below $1100), Kinross Gold (costs just under $1400), Newmont Gold (NEM) (costs around $1300) Agnico-Eagle (AEM) (costs around $1400), and Barrick Gold (ABX) (costs around $1200).

One thing we do caution investors in regard to ANV‘s true all-in costs performance is related to its inventory. As you can see in the annual report, over the last few years the company has not been able to process and sell all the gold that it has produced.

The company did mention that they are now able to process all the precipitate and second quarter results should include an additional 7,000 ounces of gold. But if significant amounts of this precipitate cannot be processed or sold then it would increase their true all-in cash cost numbers that we calculated above. Investors should keep a close eye on this issue to make sure that produced gold and silver are able to be processed and sold and the numbers stay relatively close over the long-term.

Corporate Liquidity – Liquidity is very important for investors to monitor in this current low-price gold environment. At the end of Q1FY13, ANV had $250 million of cash and cash equivalents and around $200 million of ore and inventories. Since true all-in costs are still below current spot gold prices this would ordinarily be enough to make investors confident in ANV‘s liquidity. But the company does carry more than $500 million in debt and is in the midst of a $1.2 billion Hycroft expansion, of which $720 million has been committed.

ANV did state at quarter-end that it believes that it has sufficient liquidity to fund expansion ad operations over the next twelve months, but management did state that they expect to need capital over the next two years to continue to fund the expansion. This is something that should concern investors, but they should also keep in mind that capital projects can be modified and this exceptional precious metal environment may warrant that and help the company avoid a liquidity crunch if prices do not recover.

In the short term we think ANV has plenty of capital to make it through this environment, but we would be very concerned about liquidity if either the gold price drops further or if production costs start to rise. The company has quite a bit of debt and large planned capital expenditures to balance – investors should monitor the liquidity situation very carefully for ANV.

Production Numbers – While the true all-in costs were very good, the production numbers for the company were down. On a year-over-year basis was up from 32,000 to 38,000 gold ounces, but on a sequential basis gold production dropped from 48,000 ounces. Management had forecast FY2013 gold sales to be 225,000 to 250,000 ounces, but these Q1FY13 production totals leave a lot to be desired and ANV will have to do significantly better in future quarters to meet these targets.

This underperformance was recognized by Mr. Buchan and he stated in ANV‘s press release the following:

“Clearly Allied Nevada has underperformed and this unacceptable performance is the result of unsatisfactory execution of the mine plan under previous leadership. This lack of acceptable execution does not imply that the orebody has deficiencies nor does it suggest that our overall business plan is flawed. As we indicate in this press release, guidance remains unchanged. The mine is starting to perform as it should and we currently believe that it will continue to do so.”

So management suggests this is a single quarter anomaly, but investors should pay close attention to second quarter production and ore grades to verify.

Conclusion

On a true all-in costs basis, ANV did a very good job keeping costs low and producing gold at some of the cheapest levels in the industry. But we have to qualify that with the fact that the issues related to processing and selling the gold and silver have not been fixed. If management can resolve these issues then the true all-in costs will be among the industry lowest, but if a good portion of these metals cannot be recovered or processed then the all-in costs will be much higher.

Liquidity is also another concern in the long-term because the company has issued quite a bit of debt, and to complete the Hycroft mine expansion they will need more capital. But in the short-term the company has plenty of cash to make it through the next twelve months without any issues.

Finally, production numbers were lower than expected. Management is confident that the low production numbers were an anomaly and will be outdone by increases in future production, but investors should pay close attention.

If ANV can keep costs close to current levels while continuing the Hycroft expansion, this company has the potential to post very strong earnings per share numbers. But if gold prices drop further or production costs rise and pressure margins further, the company will have a tough time funding its mine expansion and will have to make some tough decisions regarding it. Investors should be cautious with ANV and pay close attention to second quarter production numbers and management updates on the Hycroft expansion plans.

Source: http://seekingalpha.com/article/1518392-what-it-really-costs-to-mine-gold-the-first-quarter-allied-nevada-gold-edition

3 Investments For When The Gold Sell-Off Ends

As 2012 came to a close, investors increasingly questioned the wisdom of owning gold or gold-related stocks and funds. After all, a commodity known as an inflation hedge is of dubious value when inflation is nonexistent. And for investors who still expected the Federal Reserve’s aggressive stimulus efforts to eventually fuel inflation, patience was starting to wear thin.

What began as a steady exodus out of gold in the winter morphed into something a lot more dramatic this spring. In the past few months, gold has endured a pair of scary plunges that has pushed even its most ardent supporters to the sidelines. Gold prices now sit at their lowest levels in nearly three years.

(click to enlarge)

But does the Fed’s recent announcement that it will begin to wind down its massive quantitative easing (QE) program change the picture for gold? After all, part of gold‘s weakness had stemmed from rising expectations that the Fed would soon wind down the QE program. Now that rumor has become fact, has the gold sell-off ended?

One possible scenario for a gold price rebound: The Fed’s retreat from QE means that we’re moving into the next phase of a grand government financing experiment that has no precedent. Will the coming months represent a quiet phase for the stock and bond markets as investors take the Fed’s changing policies in stride? Or should we brace ourselves for greater volatility and economic uncertainty?

If that happens, gold could quite easily move back into vogue, as it is a favored investment whenever there is broad confusion about the market and the economy, as was the case in 2009, 2010 and 2011. Gold finished the past trading week at $1,292 per ounce, and any move back above $1,320 could be a sign that gold bulls are returning. So keep an eye on current gold prices, because if the selling phase has indeed passed, then the stage may be set for the next bull market in gold.

Investors have many ways to invest in gold. Let’s look at three very different options, each with their own risk and reward profile.

1. Barrick Gold (ABX)
This is the world’s largest gold miner, with proven and probable reserves of around 140 million ounces of gold (along with a lot of copper and silver). Not only has Barrick been affected by falling gold prices and the diminished profit spreads that that implies for producers, but the company has been beset by its own major mining problems in the Dominican Republic and Chile. Notably, both of those problems are being resolved, and output should return to normal later this year.

Even if you don’t expect gold prices to rebound from here, shares of Barrick Gold now appear oversold as they are still suffering from the perception of the problems noted above. Analysts at UBS, for example, think shares are worth $24.50, or nearly 50% above current levels. If gold prices rebound in coming quarters, then that price target would surely rise higher still. Merrill Lynch has an even higher $29 price target, which equates to 1.5 times the net asset value of its mines. That multiple has historically stood between 1.0 and 3.0; it stands just below 1.0 at the moment. (My colleague Chad Tracy took his own deeper look at Barrick’s valuation earlier this month.)

2. Royal Gold (RGLD)
Some investors have soured on gold miners, which tend to repeatedly face unexpected delays in permits and cost overruns on major projects and engage in poorly timed pricing hedges. This gold company skips all that and simply collects royalty checks. Royal Gold started to raise capital in 1990 and now has stakes in more than 200 properties, 36 of which are currently producing gold and throwing off royalty income.

So what does the company do with all those royalties? Roughly 30% is paid out as dividends, and the rest goes right back into the next crop of mines. Royal Gold has an interest in 23 mines still in development, and another 100 that may be put on track for development in the next few years.

(click to enlarge)

Yet the reason this stock now holds appeal may not be apparent. Royal Gold is sitting on nearly $400 million in net cash and has an untapped $350 million credit line at its disposal. The company has a history of periodic buying sprees when smaller gold miners run into financial distress. And with gold below $1,300 an ounce, these junior miners are having a hard time accessing capital to develop their mines. Royal Gold provides cash to these miners at times like this — and reaps the rewards when gold process rebound and royalty payments spike.

3. Direxion Daily Gold Miners Bull 3X Shares ETF (NUGT)
Talking about this exchange-traded fund (or ETF) right now would seem foolhardy. It is so heavily leveraged to the price of gold that its shares have plunged from $97 in October 2012 to a recent $6.50, easily making this one of the worst investments in recent memory.

Yet that kind of price action can work both ways. So if you are expecting even a modest rebound in gold prices, then this ETF would likely double or triple from current levels in a very short time. To give you a sense of this stock’s volatility, gold prices rebounded 1% on Friday, but this ETF rose a solid 2%. Of course this isn’t an investment, it’s a speculation, and as such, should be just a tiny piece of any portfolio.

Risks to Consider: The global economy is showing signs of distress, and if China or Europe weaken further, then gold continue its downward spiral.

It’s unwise to call a bottom for gold. Instead, keep an eye on the price action. If gold stabilizes at current levels and moves back up above $1,300 for a number of sessions, that could be a sign that sellers have been flushed out.

Source: http://seekingalpha.com/article/1518672-3-investments-for-when-the-gold-sell-off-ends

Gold Is Being Supplied By Western Governments

There has been considerable throughput of gold in western capital markets, with substantial buying from all round the world following the April price crash. The supply can only have come from two sources: the general public, or one or more governments. It really is that simple. Two months later the gold price has only partially recovered, so physical supplies have continued to be made available. Physical demand cannot have been entirely satisfied by ETF liquidations, confirming governments are involved. This article looks at the dynamics of the gold market around this event and the implications.

While the investing public in the western nations has been generally stunned following the April price smash, demand from Asia is running at record levels, illustrated in the chart below, which is of physical gold deliveries on the Shanghai Gold Exchange.

SGE monthly gold deliveries (tonnes)

The increase in deliveries for April and May was spectacular, totalling 460.5 tonnes, with the week ending 26 April alone seeing phenomenal deliveries of 117 tonnes. In addition, according to the Economic Times, India imported 142.5 tonnes in April and 162 tonnes in May, compared with an average monthly rate of 86 tonnes in Q1 2013. Therefore these two countries imported 765 tonnes of gold in two months, before considering any unofficial imports or their government purchases in foreign markets. The rest of Asia, from Turkey to Indonesia would certainly have stepped up their demand for gold as well, as did the western world itself for physical metal as opposed to paper entitlements.

The table below puts this into context.

Chinese & Indian gold demand

A prefatory note about the statistics in this table: there is no single defined source of statistics on gold movements, and there are considerable variations in the same numbers reported by different organisations. The figures in the table above can only illustrate bullion flows. I have sourced the statistics from official sources where possible. The cash-for-gold business has had the easy pickings by now, so an assumption that this is about 600 tonnes per annum is I believe cautiously over-generous. It is based on a speech made by Jeffrey Rhodes of INTL Commodities DMCC to the LBMA in 2010, when he identified scrap supply as 583 tonnes in North America and Europe, whose central banks are in the gold suppression business. At that time, 1,091 tonnes were recycled in the East, including Turkey. Since the Chinese, Russian and other gold-producing governments of Central Asia retain most if not all of their domestically mined gold amounting to over 700 tonnes, there is less than 2,000 tonnes of free mine supply annually available for global markets, based on US Geological Survey figures.

Looking at the bottom line for 2012, there were only 87 tonnes of gold supply for the rest-of-the-world, after Asian and Russian central bank and global ETF purchases. In other words, there must have been a severe deficit overall, which can only have been covered by central bank sales.

About 150 tonnes of ETF gold were liquidated in Q1, providing temporary relief until the Cypriot crisis, when concerns over the security of large deposits in eurozone banks prompted a flight into physical gold, but interestingly, not into ETFs. This was because there were escalating systemic concerns over having physical gold and currency deposits with European banks, while at the same time portfolio investors were worried that the 12-year bull market might have ended.

From the point of view of the western central banks, as well as the bullion banks with short positions on Comex, in March the alarm bells must have been ringing loudly. Chinese demand was accelerating and there was an increasing likelihood that ETF liquidation would cease if the gold price stabilised. If that happened, as the table above clearly shows, an epic bear-squeeze would likely develop, fuelling a rush into gold and potentially bankrupting many of the bullion banks short in the futures markets and/or offering unallocated accounts on a fractional reserve basis.

Therefore, investors had to be dissuaded from buying gold, otherwise the ensuing crisis would not only cause a market failure that could spread to other derivatives (particularly silver), but it would come at the worst possible time, given the coincidental programme of monetary expansion currently being undertaken by all the major central banks.

The reasons for governments to intervene on the side of the bullion banks were therefore compelling. As one would expect, the intervention was well-timed: on Friday 12 April two large sell orders of 100 and 300 tonnes were placed on Comex, clearly designed to do maximum damage to the price, and setting it up for all remaining stops to be taken out the following Monday. Furthermore, central banks were prepared to supply physical gold to keep the price from recovering. We know this because lower prices generated a surge in private demand, not only in China and India, but from everywhere. The only possible supply, other than inadequate ETF liquidation, is from governments.

India and China have absorbed enough gold in the last two months of April and May to leave the rest of the world in a supply deficit, requiring matching sales of western government gold to continue to suppress the price.

The future

We now know for certain that government-controlled gold has been used to defuse a developing crisis in gold markets that had the potential to destabilise bullion banks, other derivative markets and ultimately the whole fiat currency system. We have seen the surge in demand for physical gold, which is the consequence of sharply lower prices. Realistically, the priority has been to ensure such a crisis is avoided, rather than for the price of gold to be continually suppressed.

The difficulty for the casual observer is compounded by the available information being one-sided. We are all painfully aware of both the losses inflicted on investors and their loss of faith in gold at a time when other investment media, such as stocks and bonds, have been doing well. Concealed from us is the real financial condition of the banks and governments themselves, which is the fundamental reason for owning gold. We are acutely aware of the sellers’ pain and only dimly aware of the buyers’ motivation.

Nervous western investors in a market of 160,000 tonnes are in truth a small part of the whole, particularly since gold has been migrating from the west to the east where it has been more valued ever since the 1970s oil crisis. More fundamentally we know that the stock of gold grows at about 1½% annually in line with global population growth. We also know that central banks everywhere are expanding their balance sheets at an accelerating rate. The disparity between the rate of growth for gold and paper currencies will certainly lead to increased tensions between precious metals and currencies generally, and it is this that will drive future demand for gold, not whether or not western investors think it is in a bull or bear market.

A second point about the market being 160,000 tonnes and not just the sum of mine and scrap supply is that the market is far bigger than western governments’ gold reserves. Gold held by them is officially about 19,000 tonnes, but it may well be only half that, or 5% of the aboveground stock, when unrecorded leasing and selling over the last 25 years are taken into account. The ability of central banks to contain a global surge in gold demand such as that which followed the April price-crash and continuing to this day is therefore limited.

But this is only a part of the story. There are the factors concealed from us, such as the buying opportunity given to gold-friendly governments and sovereign wealth funds, both with surplus dollars, as well as the appetite for gold from the growing ranks of the Russian and Asian mega-rich. There are factors known to the financially savvy, such as the growing instability of the Indian rupee and other emerging market currencies, the increasing systemic risks in eurozone banks with the threat posed to deposits, and the revenue shortfalls that force governments to raise money by printing their currencies at an increasing pace: all will impact the gold market in coming months.

These and other systemic problems are deteriorating. A potentially destabilising crisis in the gold market from runaway prices has been defused by allowing the bullion banks the space to square their books. There can be no other realistic objective in supplying government-owned gold into the market. As to the embarrassment of the gold price rising at a time of accelerating money printing – that will have to be accepted, presumably emphasising the official line, that the gold price is irrelevant to a modern economy.

Source: http://www.zerohedge.com/news/2013-06-17/guest-post-gold-being-supplied-western-governments