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Even though the gold price increased in 2018, the top gold miners
production declined while costs continue to escalate. Output at three of
the top gold miners in the world fell in the first half of 2018 compared to
the same period last year. With rising costs due to higher energy
prices, on top of decreasing production, the top gold miners free cash flow
declined precipitously in 2018.
While many analysts focus on the company’s profits or net income, I like
to pay attention to its free cash flow. Free cash flow is nothing
more than subtracting capital expenditures from the company’s cash from
operations. Because the gold mining industry is very capital intensive,
the company’s free cash flow is a better indicator of financial health rather
than the net income.
As mentioned, all of the top three gold miners suffered production
declines in the first half (1H) of 2018 versus the same period last
year. The biggest loser was Barrick, whose production declined
over 20% by falling to 2.1 million oz in 1H 2018 compared to 2.7 Moz in the
previous year. Goldcorp’s production fell 10%, while
Newmont’s output dropped by nearly 9%:
Altogether, the top three gold mining companies’ production fell 15% or
approximately 1 Moz in the first six months of 2018 versus last year.
Even though Goldcorp isn’t the third largest gold miner in the world, the
company has already posted its second-quarter results. AngloGold is the
third largest gold miner, but it won’t publish its financial statements until
August 20th. Also, Kinross has probably ranked number four ahead of
Goldcorp, but the company posts its production figures in “gold equivalent ounces.”
If a company has to publish its gold or silver production in “equivalent
ounces,” then the analysis is a bit flawed in my opinion.
Regardless, these top three gold miners all experienced declines in
production which impacted their financial balance sheets. To get a
better idea of the true cost of production and the health of the gold mining
industry, I have come up with an “Adjusted Earnings Breakeven” price as well
as a “Free Cash Flow” breakeven price.
The gold mining industry publishes “Cash Costs” and “All-In Sustaining
Costs (AISC),” but those metrics deduct by-product metal revenues and don’t
include ALL COSTS. For instance, Goldcorp publishes a much
lower All-In Sustaining Cost of $850 an ounce because it subtracts its
by-product credits from its cost analysis. Of the $1,639
million of total revenues 1H 2018, Goldcorp sold $431 million in silver,
zinc, and misc metals. By deducting $431 million, or 26% of total
revenues, from its cost of sales, the company can post a low $850 per oz
AISC.
But, what if Goldcorp removed that $431 million in by-product metal
revenues from its financials? How would that impact its net
income?? Goldcorp suffered a $64 million net income loss 1H 2018.
If we take away the $431 million in by-product revenues, Goldcorp
would have lost nearly $500 million, not the $64 million.
Goldcorp needed that $431 million in by-product metal revenue to fortify its
balance sheet.
So, this is the sort of accounting gimmicks that the mining industry pulls
on less sophisticated investors…. which are many.
Again, I don’t pay much attention to the Cash Costs, or All-In Sustaining
Costs as they do not provide an accurate picture of what is taking place in
the gold or silver mining industry.
To get a better understanding of the financial health in the gold
mining industry, we need to look at the companies free cash flow.
In the first half of 2017, these top three gold miners enjoyed a combined
positive free cash flow of $718 million, with the majority coming from
Newmont:
Of the total $718 million in positive free cash flow, Newmont accounted
for $530 million, Barrick provided $204 million, while Goldcorp posted a
negative $16 million. However, free cash flow in all three decreased
significantly in 1H 2018 to only $38 million. Newmont’s free cash flow
fell to $173 million, Barrick declined to $9 million as Goldcorp’s dropped
even further to a negative $144 million.
Also, my estimated “Adjusted Earnings Breakeven” for the group has also
increased in 2018. If we compared my two financial metrics (adjusted
income breakeven & Free Cash Flow Breakeven) to the average gold price
during each period, we have the following:
As we can see in the chart above, these top three gold miners profit
margins were much higher during the first half of 2017, even with a lower
gold price. My estimated Adjusted Earnings Breakeven for the group was
$1,126 per oz based on an average gold price of $1,243. Thus, the
group’s gold profit margin was nearly 10% last year. However, the
Adjusted Earnings Breakeven increased to $1,230 for the group in 1H
2018. Thus, the profit margin of the group fell to 5.6%.
Also, the Free Cash Flow Breakeven per ounce increased to $1,297 versus
$1,138 last year. Because these top three gold miners combined free
cash flow was only $38 million 1H 2018, they only made a few dollars per
ounce of free cash flow. Unfortunately, free cash flow does not include
dividend payouts. These three gold miners paid a combined $242 million
in dividends to shareholders. While Newmont can afford to pay its $150
million in dividends, Barrick and Goldcorp did not have enough positive free
cash flow to pay their dividends.
Furthermore, if you watched my newest video below, you would have found
out the pathetically small amount of free cash flow the top four gold miners
reported over the past twenty years. If we take that amount and
divide it by their total production, the positive free cash flow was a
miserable $19 per ounce:
Barrick, Newmont, AngloGold and Barrick only posted a net $7.5 billion in positive
free cash flow from 1998-2017. If we divide the 391 Moz of total gold
production, the net free cash flow per ounce was $19. Now compare that
to the $832 average gold price during the twenty year period.
By focusing on the Free Cash Flow, over an extended period, we can see
that the top gold mining companies haven’t made all that much money.
Also, I haven’t included share dilution or the increase in debt. I will
cover these in another article.
If you haven’t watched my newest video about the Gold Mining Industry, I
highly recommend it:
Lastly, while I provide data that suggests the gold mining industry cost of
production is higher than the market reports or that the combined free cash
flow has been quite small, I still believe the gold miners will be one of the
few assets to own when the entire markets crash over the next several years.
I will be writing more about this in detail in future articles.
One last thing. I really appreciate the support I receive from my
PayPal and Patron Subscribers. Due to the fact that readership in the
alt-media community has fallen significantly over the past year, advertising
revenues have dropped big time as well. So, if you have
considered becoming a member on the SRSrocco Report site in the past, we
would greatly appreciate your support.
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