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

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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.


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

Gold sheds nearly $100 for the week

Gold prices ended slightly higher on Friday but swung to a weekly loss of nearly $100, fueled by a potential slowing of the Federal Reserve’s bond purchases later this year.

Gold for August delivery GCQ3 -0.16% gained $5.80, or 0.5%, to $1,292.10 an ounce, but posted a weekly loss of $95.60.

Yields on the 10-year U.S. Treasury note 10_YEAR +1.45% pushed above 2.5% briefly on Friday and U.S. stocks fluctuated in choppy trading.

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The slight rise on Friday was a consequence of buying from bargain hunters, said Vedant Mimani, lead portfolio manager of Atyant Capital’s Global Opportunities Fund.

Still, gains were subdued because of continued selling, he said. “It’s been sold pretty hard during the last two days,” said Mimani. “Now everyone is just waiting.”

Gold futures halt their fall Friday as the U.S. dollar edges lower.

The contract had plunged more than 6% during Thursday’s floor trade on the New York Mercantile Exchange, as investors continued to price in the Fed’s possible trimming of its monetary stimulus later this year. The Fed currently buys $85 billion in mortgage and Treasury debt each month as part of its efforts to spur the economy.

After settling Nymex trade at $1,286.20 an ounce, which was the lowest close since September 2010, August gold took further damage on news that exchange operator CME Group Inc. CME -0.39% was hiking margin requirements.

The CME, which owns the Nymex’s metals-trading Comex division, said following Thursday’s close that it would hike initial and maintenance margins for gold by 25%, according to reports.

The increase means speculative traders must have $8,800 to open a 100-troy-ounce position, up from $7,040, and keep $8,000 to hold the contract overnight, up from $6,400, Dow Jones Newswires said.

The new margins would come into effect after Friday’s close, CME said.

The ICE dollar index DXY +0.29% rose to 82.317 in late Friday trade. A stronger U.S. currency tends to weigh on gold and other dollar-denominated commodities, as it makes them more expensive for holders of euros, yen and other units. The relationship between the dollar and gold futures isn’t set in stone and tends to be stronger on days with big moves, said Mimani.

The dollar had rallied since the Federal Reserve’s statement late Wednesday, signaling it could slow its asset purchases this year if the economy improves further.

Gold plunges below $1,300

Traders scramble to sell gold as prices fall to lowest level in nearly three years. Photo: AP

The price action is a recouping of prior-day losses rather than a result of news, said Carlos Sanchez, director of asset management at CPM Group.

He noted that options will expire next week, which should increase volatility as the July contract will become deliverable at the end of June. As a consequence, “you may see some more activity in the silver market as opposed to the gold market toward the end of next week,” said Sanchez.

The July contract for silver SIN3 -0.72% ended up by 14 cents, or 0.7%, to $19.96 an ounce, after dropping $1.80 on Thursday.

Elsewhere in the metals complex, copper for July delivery HGN3 -1.36% settled at $3.10 a pound, up 4 cents or 1.3%, while September palladium PAU3 -0.47% rose $9.65, or 1.5%, to end at $674.75 an ounce.

July platinum PLN3 -0.10% gained $5.70, or 0.4%, to end at $1,369.50 an ounce, after losing more than $60 in Thursday’s Nymex action.

Source: http://www.marketwatch.com/story/gold-halts-its-tumble-as-us-dollar-ticks-lower-2013-06-20

Softening My Views On Gold

I continue to maintain that the Fed’s unprecedented and extreme current policy stance has already been deceptively inflationary, will likely lead to significant inflation in the medium to long term, and should lead to an accompanying large increase in the price of gold. I also must acknowledge, however, that I fell prey to a false sense of certainty. The combination of the consistency of the gold price rise over the course of a long period of time, my early success in this area and the rationality and logical basis of the investment thesis caused me to make exceptions to rules that I always had followed – rules against excessive concentration and rules preventing me from venturing beyond stocks, my area of expertise and the category of investment that I like best for good reason. I will never make such exceptions again.

I had previously never invested in unproductive assets such as currency-based investments, preferring stocks because they confer ownership stakes in large, profitable companies, no different than owning a small business, rental real estate or a farm in terms of being productive. I made an exception for gold and silver, because I considered them to be the ultimate form of money and likely to perform better than stocks in a highly inflationary environment. Upon further reflection after an unfortunate experience, I have concluded that one must have respect for the current form of money, regardless of whether it is being abused and debased. We live in a dollar-based world, and until gold is reintroduced into the monetary system (the prospects of which are not guaranteed as macroeconomic developments are notoriously difficult to predict), it is really simply a collectible no different than say fine art in that ownership provides no income as it has no cash flows associated with it. Instead the owner is reliant upon another investor or speculator being willing to pay more for it, thus voiding valuation techniques.

With all of that said, it is worth repeating that I do still believe that the price of gold is likely to rise very significantly over time. I expect that my fund will benefit from this insight, but not via physical gold holdings. Instead our focus is on mining stocks, which are productive assets that can be valued on the basis of earnings, dividends and the historical relationship between these stocks and the spot price of gold – all of which does not necessarily require a forecast of the gold price or a very strong view about it. With long-term interest rates rising and reported inflation falling, gold very well may remain under pressure, but even in such an event I believe that the miners are still priced attractively enough to deliver solid returns.

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Moving on to my stock market outlook, it remains strongly negative for all of the same reasons that I have been repeating for quite some time. Each month that the market moves higher, conditions continue to become more extreme – namely overvaluation and extremely complacent investor sentiment measures. This long uncorrected and quite mature bull market is also now showing a record high level of margin debt associated with it on an absolute basis, and on a relative basis compared with the size of the economy it is now right around levels that have only been reached twice before – 2000 and 2007, just before the two most recent major bear markets. Increasingly I hear people only tempering their enthusiasm with expectations of a correction, as if a full-blown bear market is out of the question. But when the crowd agrees on something, it is usually wrong. It is vital to remember that markets move in cycles.

On the last trading day of the month, there was a steep late-day sell-off as fears of the Fed tapering its easy monetary policy (unlikely), weak Chinese data, Japanese stock and bond market volatility and now suddenly rising interest rates all came to the fore. Perhaps this is the beginning of what I have been anticipating, or perhaps the final top has still yet to be reached. Either way, my outlook will continue to remain negative until hostile market conditions are cleared. Accordingly, my fund still retains a limited market exposure and a very large cash balance, presently just about half of the portfolio. With so much cash it is important to repeat again that cash that stands ready to be deployed quickly is a weapon, as compared to cash that is allocated as such which over time is guaranteed to lose out to inflation.

Despite such a dismal market outlook, I will always remain a bottom-up investor. While I am concerned about indiscriminate selling, even at times such as this there are still pockets of value (the most prominent example of such right now being the gold miners as discussed above).

Source: http://seekingalpha.com/article/1516472-softening-my-views-on-gold