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Gold miners are finally acknowledging they've put too much of a shine on their numbers in the past. Yamana Gold Inc. and Goldcorp. Inc. both recently said they'll start disclosing more information about their true costs going forward. Others are expected to follow. The change is long overdue, but stops well short of telling the full story.
Miners like to talk about their "total cash costs" but those numbers don't represent the full cost of digging and processing the metal. As ROB Insight noted last November, total cash costs exclude general and administrative expenses, basic maintenance and capital expenditures to sustain facilities and mines, corporate taxes and even the cost to shovel out dirt that contains no gold. Some argue the cost of exploration should also be included since that helps miners maintain production levels.
Stifel Nicolaus analyst George Topping notes that while total cash costs for Canadian miners Barrick Gold Corp, Goldcorp., Kinross Gold Corp. and Newmont Mining Corp. ranged from roughly $500 (U.S.) to $600 per ounce in 2012, their "real total cost" by his calculation ranged from $1,730 to $1,880 – an important consideration given that exceeds the gold price and means they're earning "marginal or negative free cash flow after dividends are paid." Raymond James analysts have found a similar gap in their calculation of the average cash cost per ounce for gold miners they follow ($740) and "all-in-costs" (around $1,300).
The World Gold Council, representing gold miners, has heard the complaints and is pushing to develop a new "all-in sustaining cash cost" measurement that would better reflect the costs. The problem remains, however, that this measurement excludes key numbers such as net interest expense, taxes and new project capital expenditures – all costs that affect cash flow. In its 2013 guidance, Goldcorp says its all-in sustaining cash cost will be $1,000 to $1,100 per ounce. When you add the missing figures, Mr. Topping estimates Goldcorp's true costs will actually top $1,800.
Raymond James analyst Brad Humphrey argues this is a good start – at least gold miners are acknowledging they need to improve their reported numbers. There is arguably no better time to fix their accounting than now, when interest from investors is waning and royalty taxes in such places as Ghana and Ivory Coast are potentially on the rise. The short to medium term effect might be negative, but would bring more realistic expectations along with more rigorous and effective cost management. Gold sector financials don't need a buffing, but rather a proper cleaning.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.
Sean Silcoff