(Article updated with executive comments and gold price information.)
HOLLYWOOD, Fla. (
) -- Gold mining companies raked in the cash in 2010 thanks to record-high
, but rising costs are likely to be a growing threat this year despite gold reaching record highs.
The chief executive officers of major gold mining operations have gathered here this week for the BMO Capital Markets 20th Global Metals & Mining conference. Many took the time out of the conference to meet with
to discuss the headwinds their companies are facing this year, which include rising raw material costs, higher labor pay, escalating taxes and exchange rate problems.
Many of these executives have recently reported strong fourth-quarter earnings results that were largely fueled by
hitting a then-record 2010 intra-day high of $1,432.50 an ounce.
While good news for investors, the dominant theme that emerged from those results centered around the rising battle between higher revenues and steeper input costs. Cash costs are the lifeblood of miners. The more money it takes to produce an ounce of gold, the weaker their profit margins.
A gold miner who can sell gold near spot price, assuming that the gold is particularly high grade, can make almost $1,000 in profits if cash costs are close to $400 an ounce. But that number seemed hard for some companies to achieve, and that number is even harder to achieve when you look at total cash costs.
Most companies think of cash costs as how much it takes to produce an ounce of gold. Gold companies sell secondary metals like silver or copper that are the by-products of gold mining to help offset the cost of mining gold. That accounting can also cloud the picture.
, for example, $465 to produce an ounce of gold in the fourth quarter, but counting its by-product credits that number was negative $34, which incidentally is expected to jump to$250 in 2011 as rising input costs catch up to the company.
Taking into account total costs -- or operating costs plus capital expenditure plus exploration costs -- muddies the issue further. The industry average is around $900 to $1,000, which puts profit margins in a whole new light.
"You've got to look at the overall cost of producing an ounce," says Nick Holland, CEO of
, "including sustaining growth capital and combining the two, GNA, operating costs, etc." Gold Fields estimates that total costs could be between $750 to $1,050 an ounce in 2011.
All gold miners are subject to this discrepancy.
's estimated cash costs for 2011 (including by-products) are between $280 and $320, while total costs are just under $700.
is projecting cash costs between $450 and $480, while total costs are between $750 and $800. Both of these behemoths have some of the lowest cash costs in the industry, which is reflected in their total costs.
have higher costs. Agnico had 2010 cash costs at $451 an ounce while total costs are $900 to $950. AngloGold is expecting 2011 costs to be between $660 and $680 while real costs are $900 an ounce, which is the "bottom half of the industry," says CEO Mark Cutifani.
The silver market is subject to the same dilemma.
Coeur d'Alene Mines
produced silver for $7.05 an ounce in 2011 but total cash costs were $11.
Most miners are hoping to offset rising costs by producing more gold or by finding "better," or higher grade, gold. High gold prices make lower grade gold more economical to mine and easier to find but don't really help the companies' margins. "Good" gold is the best defense.
The snag is that the world is running out of the yellow metal. According to the World Gold Council's Gold Demand Trend report, mine supply increased 3% in 2010 to 2,659 tons but overall gold demand popped 9% to 3,812.2 tons. Those that are lucky enough to find large amounts of higher grade gold will be able to weather this inflation storm, but those who can't, could be in trouble.
After fourth-quarter earnings, the leaders seem to be Goldcorp and Barrick, both of which had no production problems, have low cash costs and seem the best equipped to handle higher raw material costs, but all companies are preparing for a rough road ahead. Holland from Gold Fields said that gold prices realistically need to stay between $1,250 and current spot price for gold miners to keep seeing free-flowing cash..
For an investor wanting to buy
as gold prices soar, it can be a risky endeavor. The nuts and bolts of traditional financial results like earnings per share are less important than in other sectors. Instead, it's best to focus on how much gold the company has in the ground, how much it will produce, for how long and at what costs.
Written by Alix Steel in
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