Gold miners’ break-even costs break downward trend

A report by National Bank Financial shows that senior gold producers are able to keep their heads above water in a low-gold-price environment. The same cannot be said for mid-tier producers, which spend more to produce an ounce of gold than they realize from its sale.

Gold analyst Tanya Jakusconek notes that the senior producers’ break-even costs averaged US$285 per oz. in the first quarter of this year, with almost every senior producer below US$300 per oz., except Placer Dome (PDG-T), which had break-even costs of US$303. On the other hand, the mid-tier companies produced gold at an average break-even cost of US$326 per oz. in the first quarter, compared with US$349 in the last quarter of 1999.

During the first three months of 2000, total break-even costs for the industry as a whole broke their downward trend of the past 12 quarters (with one exception: the last quarter of 1998). Costs rose 3%, or US$8 per oz., for the period, to an average of US$292 per oz., from US$284 per oz. in the last quarter of 1999.

The industry’s break-even costs averaged a mere US$2 per oz., over the average spot price of US$290 per oz., but were US$29 per oz. lower than the average realized price of US$321 per oz. (including hedging gains).

Break-even costs are defined as consisting of: cash costs plus royalties; production taxes (total cash costs) plus depreciation, depletion and amortization and reclamation costs (total production costs); and general and administration expenses, exploration expenses, and income and mining taxes. In simple terms, break-even costs represent the true cost to a company of producing an ounce of gold.

“The benefits of cost-cutting through 1999 and into the first quarter of 2000 allowed senior producers to realize a modest cash margin of US$5 per oz. on a spot gold basis,” Jakusconek states in her report.

Newmont Mining (NEM-N) posted the lowest break-even costs in the senior group at US$278 per oz., owing to its expanded production for the quarter, while Homestake Mining (HEM-N), helped by its cost-cutting program, came in second at US$280 per oz. Barrick Gold (ABX-T) cut its break-even costs by US$7 per oz. to US$282 per oz. in the same period.

The lowest-cost producer in the battered mid-tier group proved to be TVX Gold (TVX-T), which came in at US$275 per oz., while Agnico-Eagle Mines (AGE-T) had the highest first-quarter break-even costs, at US$375 per oz., owing to high cash costs.

Jakusconek notes that the mid-tier producers have been unable to reduce total cash costs to the same extent as the senior group. “Only TVX Gold was able to show positive cash margins to the spot price and its realized price, owing to its low break-even costs and deferred gains from the close-out of its hedge book in 1998.”

The gold analyst concludes her report by observing that, with a few notable exceptions, “the use of forward selling to insulate against commodity price risk has acted as a successful buffer to continued weak gold prices, despite arguments that the former is a significant contributor to the latter.” And with break-even costs at US$292 per oz. for the group as a whole, “a rise in the spot gold price would result in significant earnings generation from the producers.”