Calculating the value of gold has been under more scrutiny in recent years, leading to a new way to measure the value and cost of gold. Read on to gain a better understanding of Gold’s true cost!
Over the last several decades, the cash cost of gold mining have been rising dramatically. This is due to the lower grade depths being mined, and their associated energy costs, consumables, and labour.
In order to understand how the cost and value of gold are calculated, there are a handful of terms you’ll need to understand. These terms are:
In the beginning, cash cost was the main point of discussion. It refers to the cost of gold production at the mine level. It doesn’t include depreciation, taxes, exploration expenses, refining costs, head office costs, interest expenses, capitalized development, or land remediation.
That is quite the blind-spot when you’re an investor. As a result, the next measure of assigning a value to gold production was sure to provide more transparency into the true cost of gold production.
All-in Sustaining Cost is a combination of Cash Cost with the addition of off-site expenses more generally associated with gold production. Factors such as gold exploration expenses, head office costs, and all other sustaining capital play an important part in the gold production profitability picture.
However, the all-in sustaining cost still does not account for acquisition costs, development capital, interest expense and taxes.
Generally accepted accounting principles are generally understood as accounting standard accounting practice.
EBITDA stands for “earnings before interest, taxes, depreciation, and amortization. It is a non-GAAP metric which is effective for evaluating profitability, but less so cash flow.
And even so, it cannot be considered alone; often EBITDA is used to dress up reporting, and items which are factored under this metric can change from one reporting period to another.
As a result, many professionals in the gold industry feel that perhaps EBITDA allows for a little too much corporate discretion and not enough transparency –and so they are sure to compare the EBITDA with other performance measures to provide a complete picture.
Alright, back to the story.
A Look at Current Gold Prices
In the year 2013, the cost of gold had continued in the trend of changing unpredictability for gold buyers in Australia and beyond, however when averaged out, the cash cost of gold production was around 60% of the AISC cost.
When the industry heavyweights Goldcorp, Barrick Gold, Newmont Mining, Yamana Gold, Randgold, Kinross, Agnico Eagle Mines, Eldorado Gold, Goldfields and Canterra were all put on a spreadsheet and their cash costs and AISC were averaged out; all companies in, cash costs averaged around $672 USD per ounce, with an average AISC of $1,086 USD.
Why the Gold Industry is Looking Volatile
Even with new metrics and acronyms, there still is not a standardized AISC value, and more needs to be done. AISC still does not include development capital, acquisition costs, taxes or interest expenses –so there’s still some ambiguity in the language.
In a perfect world, you could subtract the value of gold from the operating cost of gold on a per ounce basis –but you can’t do that with AISC or EBITDA –everything feels a little vague.
This just might be the last distraction from what is really happening to the gold industry. The truth is the industry will not survive or flourish until the market shrinks. And that means less competition.
It is quite likely that gold will no longer be profitable for smaller operations, and many industry players will not be able to remain competitive. The long game doesn’t look so great and many will probably close down or sell out.
Over time, it is predicted that gold will be left to the bigger mining companies and all smaller businesses will be shut out because of high overhead costs well outnumbering profit margins.
Even with an estimated $3 billion USD in gold deposits around the globe, North America appears to have the lowest costs for gold production, with Africa being the most expensive. Mines situated in Ghana take the top price gold by the ounce, making the Obuasi Mine the most expensive mine on the planet –with gold production costs often over 1/3 of the cost of other parts of the world.
This is all proof-positive that gold industry is in for a giant shake-up –Investors beware! For an illustration of the true cost of gold, check out the infographic below.