How Costs Shape Up for Gold Producers

March 16, 2009 | By: FP Trading Desk

Everyone evaluates gold companies using total cash costs. But precious metal analysts at RBC Capital Markets have gone further and evaluated them on what they call "all-in cost per ounce." This includes exploration, sustaining capital, and general and administrative expenses. The idea is to figure out what these companies are really paying to produce an ounce of gold.

Based on these numbers, the Tier I (large) gold producers have costs of US$582 an ounce, while the Tier II (smaller) producers have costs of US$634 an ounce. The analysts noted that Tier I producers have lower G&A and exploration expenses, just because of their greater economies of scale. On the other hand, the Tier II's require less sustaining capital because they have smaller (and usually newer) operations. They should also have much more free cash flow in the next couple of years as their major development projects come online.

"With an expected decline in project capital spending and plenty of free cash flow available, we look for Tier II Golds and Newmont to be engaged in M&A activity to keep their production tank full, while the Tier I producers like Barrick, AngloGold and Kinross will likely look to continue investing in projects in their existing feasibility/development pipelines," the analysts wrote in a note to clients.

They also pointed out that South African miners are unique in that about 90% of capital spending goes to sustaining capital on existing projects, rather than new mine development. That is due to the very long life of the South African gold reserves.

Peter Koven

Tier I producers: Goldcorp Inc. (GG), Kinross Gold Corp. (KGC), Newcrest Mining Ltd., Barrick Gold Corp. (ABX), AngloGold Ashanti Ltd. (AU), Yamana Gold Inc. (AUY), Lihir Gold Ltd. (LIHR), Newmont Mining Corp. (NEM), Gold Fields Ltd., Harmony Gold Mining Co. Ltd. (HMY)

Tier II producers: Iamgold Corp., Simmer & Jack Mines Ltd., Red Back Mining Inc., Randgold Resources Ltd. (GOLD), Eldorado Gold Corp. (EGO), Agnici-Eagle Mines Ltd., Centerra Gold Inc.

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