February 2013

All-in gold cost reporting

New metric set to woo shareholders and discourage taxes

By Krystyna Lagowski

Goldcorp, which is developing its Cerro Negro property in Argentina (above), hopes a new all-in cost metric for producing gold will help investors make good decisions | Courtesy of Goldcorp

Goldcorp began 2013 by introducing a new all-in sustaining cost metric of $1,000 to $1,100 per ounce. The strategy is meant to both increase transparency and appease shareholders who, according to company vice-president of strategy Rohan Hazelton, believe standard operating cash costs no longer reflect the full cost of producing an ounce of gold.

“This is a very capital-intensive business,” he said. “The new metric includes cash costs, plus exploration – both expensed and capitalized exploration – plus general and administrative expenses, as well as sustaining capital.”

Hazelton explained that including sustaining capital was essential. “Our investments in a brand new mine like Cerro Negro in Argentina or a major new expansion at an existing mine like Cochenour at Red Lake need to be made in order to grow our annual production, and should be reflected,” he said.

He sits on the World Gold Council’s committee to evaluate a global all-in cost measurement, where discussions are still in progress. “We wanted to begin communicating to all stakeholders and Goldcorp staff without waiting for consensus among our peers,” he said, adding that when there eventually is an industry metric, Goldcorp will adopt it.

Yamana is another gold miner that has adopted a new metric, expecting its all-in sustaining cash costs for 2013 to be below $800 per gold equivalent ounce – rolling in silver production to their figure.

Jose Suarez, Accenture managing director and North American mining industry lead, believes that the implications for the market are positive, since the inefficiency of capital projects were hurting gold stocks. “This will bring more visibility and more certainty to the market, across the board,” he said, “not just for gold miners, but for everyone.” He expects that other gold miners will follow suit, as will other sectors in the mining industry.

However, Suarez thinks capital projects should also be part of the all-in cost, unless they are part of a sustainability project. “Capital projects should continue to be on the balance sheet, and need to be managed properly to ensure we don’t have the cost blow-outs we had in the past,” he said.

According to George Topping, managing director at Stifel Nicolaus Canada Inc., governments around the world have been steadily increasing taxes on mining companies due to misconceptions perpetuated by low cash costs. “They’re looking at mining companies as cash cows, when in fact, we’re not at that stage yet,” he explained. “The government is happy for you to spend money, and they obviously want to benefit from the boom in metal prices.”

In order to satisfy shareholder demands, Topping said, mining companies had been pursuing growth at any price. “The companies were finding that their balance sheets could not sustain this pursuit of growth,” he said. “Barrick has $13 billion of debt, so their balance sheet is really stretched, and they have to spend the next couple of years paying that down.”

Topping compares the situation to Europe. “Companies went on a spending spree for as long as they could, until their lenders started to balk at the balance sheet,” he said. “Shareholders here have been voting with their feet. The funds have been flowing out of the sector and share prices are falling. To bring that money back, you have to set expectations low and to beat them, to meet your targets instead of disappointing every quarter.”

He suggested managers need to work hard to gain back investor confidence by using their own salaries to buy shares or even to buy gold bullion. “That way you’re helping to offset and leverage the gold price,” Topping said. “You don’t have to expand production; you’re expanding exposure to the gold price by buying gold on your balance sheet.”

Further, Topping said being a gold investor could be made more directly connected to the value of gold itself. “Dividends could even be paid in gold bullion,” he said. “Why not? If people don’t like gold, they shouldn’t be buying a gold mining company.”

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