With the gold price waffling near $1,200/ounce, close to the ‘fully loaded’ cost for many gold producers (Dundee’s definition of fully loaded cost = the sum of Total Cash Costs (incl. royalties) plus, cash G&A, exploration, cash taxes, cash interest and true sustaining capital costs), the #1 topic of conversation among gold mining investors & analysts are costs.

Dundee Capital Markets is out with a value-added piece of research focused on costs in the gold sector – some key excerpts:

  • Fully Loaded Cash Costs (FLCC) were US$1,287/oz for Dundee’s gold sector coverage universe in Q3/14
  • Costs among gold producers continue to trend lower, although the rate of decline is slowing

Gold_Universe_Costs

  • A major source of cost containment in recent quarters has been a decision by producers to limit, defer or cancel capital projects
  • Some of the risks of slashing capex too aggressively include “sterilization of resources, inadequate exploration to replace reserves and/or insufficient maintenance and development expenditures which could result in future operational disruptions.”
  • Smaller producers have been hit hard by the decline in the gold price while many larger producers benefit from higher quality operations and economies of scale

Total_Cash_Costs

The $1200/oz level has become an important profitability barrier for gold miners; mid-tier producers such as Primero and Kirkland Lake (and a dozen similar producers) would feel the squeeze on a sustained move below $1,200 which could elicit a significant supply response from higher cost producers.

  • Dundee forecasts Barrick’s (ABX – world’s largest gold miner) fully loaded costs at $1,184/oz in 2015 and $1,181/oz in 2016 which again adds weight to the importance of the $1,180-$1,200 area for gold
  • Barrick (ABX) and Kinross (KGC) have executed admirably in containing costs in recent quarters while Alamos Gold (AGI) and Dundee Precious Metals (DPM) are moving in the wrong direction on the costs side

Fully_Loaded_Costs_by_Producer