Despite the best efforts of the gold industry, total cash costs continue to rise on a year-over-year and quarter-on-quarter basis, according to a note from Dundee Capital Markets released Thursday.
The brokerage attributed this to a variety of factors, including operational challenges at the companies it covers, the introduction of higher cost mines into its coverage universe, new tax laws in Mexico and operating cost inflation on a per tonne basis.
"While some companies have divested or closed higher cost assets (ABX, K, G, YRI), the associated cost reductions were more than offset by the increases noted above," the Dundee analysts said.
Dundee noted that with the gold price under pressure, producers have adapted to the current environment through cost cutting, saying some have been more active than others, though virtually all have made an effort to rein in non-essential spending.
Recent examples of cost-cutting measures by gold miners include Barrick's (TSE:ABX) corporate staff reduction, Iamgold's (TSE:IMG) executive staff cut, and Kirkland Lake Gold's (TSE:KGI) 15 percent labour force reduction over the past two quarters, which resulted in its first quarter of positive free cash flow in 13.
Miners continue to focus on operating and capital cost reduction to preserve margins, but further cost slashing may need to be done. Dundee said that cash margins, in its coverage universe, were on average negative $5 an ounce in the third quarter, down $33 an ounce year-over-year.
Of the 18 producers under coverage, only nine were successful in generating positive margins before accounting for growth capital, dividends or debt repayment, it added.
The brokerage said it believes tough decisions are likely being made with the next four quarters in mind rather than the next four years. This means producers will likely have to undercapitalize mines, which while providing a near-term capex reprieve, carries some longer-term risks such as sterilization of resources and inadequate exploration.
Dundee said that two key drivers of future production --- sustaining capital and exploration per ounce of production --- already declined by 15 percent and 29 percent, respectively, in the third quarter on a year-over-year basis.
Still, of the companies in its coverage universe over the third quarter, nine of 18 had fully loaded cash costs below the average third quarter spot gold price of US$1,282 an ounce, with this figure heavily weighted towards larger producers. Those with cost structures above spot gold were mainly smaller and transitional producers, Dundee said, such as AuRico Gold (TSE:AUQ) andKirkland Lake Gold.
Dundee's fully loaded cash cost measure includes the sum of total cash costs, including royalties, plus cash G&A, exploration, cash taxes, cash interest and true sustaining capital costs.
"Given that the measure takes into account all costs associated with running a mining company, we believe our FLCC definition provides an indicative measure of a gold producer's cash margins per gold equivalent ounce sold," Dundee wrote.
"While efforts remain underway to trim spending across the spectrum, we note that costs, for the most part, remain sticky making it difficult to implement sweeping reductions without drastically overhauling operations.
"While some would argue these changes are necessary, the gold miners find themselves in a challenging predicament where short term profitability must be weighed against long-term sustainability," the firm concluded.
Senior producers in Dundee's coverage universe include Barrick Gold, Goldcorp (TSE:G) and Kinross Gold (TSE:K). Intermediate producers include Agnico-Eagle Mines (TSE:AEM), Detour Gold (TSE:DGC), Eldorado Gold (TSE:ELD), Iamgold(TSE:IMG), New Gold (TSE:NGD), Randgold Resources (NASDAQ:GOLD) and Yamana Gold (TSE:YRI).
Junior producers include Alamos Gold (TSE:AGI), AuRico Gold (TSE:AUQ), B2Gold (TSE:BTO), Dundee Precious Metals(TSE:DPM), Kirkland Lake Gold, Marlin Gold (TSE:MLN), Perseus Mining (TSE:PRU), Primero Mining (TSE:P) and Timmins Gold (TSE:TMM).