Goldmining costs 50pc more than reported
BY: PAUL GARVEY From: The Australian January 21, 2013 12:00AM
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Source: The Australian
THE true cost of producing gold is more than 50 per cent higher than the cash costs goldminers report to their shareholders, new research shows.
An analysis of the goldmining sector by Bell Potter analyst Stephen Thomas found that the average total production cost was $1170 an ounce, compared with an average reported cash cost of $773 an ounce.
The findings will add further weight to growing investor calls for greater transparency about production costs, with the conventional methods of reporting ignoring many major imposts such as taxes, royalties, exploration, administration and capital expenditure.
Major global investment heavyweights BlackRock and Baker Steel are among the investors that have called for the mining industry generally -- and the gold sector specifically -- to change the way production costs are reported.
Gold stocks worldwide have been underperforming the gold price in recent years, with miners failing to convert a rising gold price into an equal rise in profits.
Mr Thomas told The Australian that the reluctance of goldminers to embrace a total cash cost figure would work against their efforts to attract new investors. "Increasingly we're trying to introduce or attract the generalist funds, particularly out of London and the US, who are not specialist resources people," Mr Thomas said.
"To attract a bigger pool of investors, we need to be upfront on a routine basis about the total cost of production."
North American goldminers GoldCorp and Centerra Gold have recently moved to report so-called all-in production costs, rather than the basic cash cost measure favoured by the bulk of the industry.
Australian-listed miners Newcrest Mining, Kingsgate Consolidated, St Barbara Mines and Northern Star Resources also report a production cost that includes expenses ignored by typical cash-cost reporting.
Bell Potter's Mr Thomas said the gap between cash costs and total costs had blown out over the past decade as cost inflation across the resources industry drove up inflation.
"Because the capital cost base in Australia has increased substantially, there's a push for more disclosure on total costs. It has become a meaningful amount due to capital cost escalation," he said.
Kingsgate chief executive and managing director Gavin Thomas has been calling for better disclosure of costs for several years.
He said companies were "delusional" to exclude costs such as royalties from their reported cash costs.
"How can you produce an ounce of gold and not call a government-mandated royalty part of your cash costs?" he asked.
He said investors were increasingly concerned about companies' cashflow performance, and any miner that painted an incomplete picture about its cost base would increase its chances of disappointing investors.
"I'm a great believer in making the numbers understandable and believable.
"And if we as an industry don't make those numbers readily understandable to the public, how can we expect them to invest?" he said.
"If sophisticated analysts are confused, how can we expect retail investors not to be confused?"
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