Top Gold Miners Production Declined 15% While Costs Escalate

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 is likely 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 compare 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 cumulative 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.

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27 Comments on "Top Gold Miners Production Declined 15% While Costs Escalate"

  1. Michael Kohlhaas | July 30, 2018 at 3:45 pm |

    How long will the miners mine? We are screwed! The whole system is crap!

    • Ya left out that none of this means a hill of beans….

    • Steve, You couldn’t have timed this report any better! Vanguard just announced that it’s removing its hedgefund trading of gold come September. There’s your sign! Congratulations on covering such an important topic at the right moment.

  2. Miners will keep mining as long as they can sell stock or bonds.

  3. Isn’t the Free Cash Flow (FCF) an incomplete measure to gauge the health of the company because you ignore growth capex. Agnico (AEM) for example generates neg. FCF because of its large expansion project. AEM could easily show FCF by scrapping its projects.

    • Speiss,

      Yes, the mining companies use CAPEX to expand projects. But, as I have shown, the top four miners cumulative free cash flow over a 20 year period was only $7.5 billion based on 391 Moz of gold produced. Thus, their FREE CASH FLOW per ounce of gold was only $19.

      And, these companies are not growing in gold production, rather it is falling. So, it just goes to show how CAPITAL INTENSIVE the gold mining industry is and that large investment is not resulting in growing gold production. Instead, the CAPEX is being used to keep gold mine supply from falling too rapidly.


      • Fascinating. And now we know why M&A (mergers & acquisitions) have practically ground to a halt. Everybody’s lining their pockets with the seed corn and doing nothing to build a war chest. It’s too bad, because opportunities are being missed.

  4. Steve, you provide valuable information, but the most important thing is market sentiment. Only when people are scared that they will lose their money buying stocs, will they turn to PMs.

    • Ed, when people get scared, there are still central banks that can prop up the “market”. This is from 2016, I assume the buying spree has grown bigger 2 years later:

    • Ed,

      Totally agree on the market sentiment. Which is precisely why I continue to write articles on ENERGY and the staggering amount of DEBT & LEVERAGE in the markets. When the markets begin to unravel, watch as Precious Metals Sentiment and buying surges.


      • DisappearingCulture | July 31, 2018 at 8:08 am |


        I’ve postulated that the cooperating Western governments + Japan + their central banks can do a lot about stopping cryptocurrencies if & when they want to; that most people are not using or viewing them as a currency. They just hope to buy low and sell higher, and make more fiat. And since they are viewed by many hopefuls as “the investment of the future”, they are being left alone so they can siphon investment away from PM’s. To some degree it has worked, and they are hoping the sector will work hard again to divert fiat from PM’s.

        • Agreed DC. More distraction. Within a certain bandwidth, no danger for fiats, less physical buying in pm’s. Add a few trolls on blogs to the mix and voila, another year of faith and credit. Lets punish the evil hoarders when it ultimately fails.

  5. Thanks for all your brilliant articles, Steve!!

  6. Goldcorp mines a significant amount of silver, zinc and lead. Their penasquito mine is an incredibly profitable mine. Ore grades will be increasing significantly in 4th qtr of 2018. Also they are implementing their gold-silver waste water recovery system now which will recover 100,000 ozs of au and 5 millions ozs of silver annually. Penasquto’s gold cash cost in 2019 and 2020 should be a negative $1000 oz due to by products. Their gold production in 2020 should hit 700,000 ozs annually or $1.5 billion in gross profit at $1300 gold before capex and taxes.

    Your really off base Steve.

    • norm lasky,

      I see we differ in our opinion on Goldcorp. Unfortunately, you aren’t doing your own thinking as it pertains to gold mining financials. Over the past 20 years, Goldcorp’s cumulative Free Cash Flow was a negative $15 million. Funny that you mention that Penasquito will have a negative $1,000 cash cost because of its by-product credits. This reminds me of Hecla who publishes a low $4 Cash Cost for Silver, but the company isn’t making much money.

      However, I see the Gold Miners doing very well when the gold price takes off. But, right now, I disagree with you on Goldcorp’s present financials.


  7. Slightly off topic: Here is a link that tracks oil exports and imports by tariffs. It compares 2017 to 2013 and shows that over the last 5 years oil exports from traditional producers like Saudi Arabia have fallen off a cliff. When I started reading the charts, I had to wonder if we hadn’t already started to see the effects of the Seneca Cliff taking place.

    The 13 other top sources of crude oil posted declines over the 5-year period ranging from -69.2% for Venezuela and -55.5% for Nigeria down to -32% for Canada and -14.5% for Iran.

    Other notable declines include -54.5% for Saudi Arabia, -53.6% for Kazakhstan, -53.4% for Angola, -53.3% for Mexico, -52.1% for Kuwait, -48% for Norway and -46.3% for Russia.

  8. Another thought provoking artcle which will take time for me to understand. My immediate ” impression ” is that gold mining costs are being inexorably co mingled with mining of zinc, copper and other target metals, and thus gold as a secondary byproduct gets a free ride of cost shifting, which of course can leave it suddenly stranded like date dumped on the curbside if the economily suddenly slows and demand for the primary metals deteriorates. Do primary gold/ silver mines flip , i.e., sell any significant metals from their gold mines?

    • Hubbs,

      Precisely. If we have two gold miners with the same production and cost structure, but one is receiving 10% of its revenues from silver and base metals while the other is receiving 40%, the company with the 40% by-product revenue’s CASH COSTS or ALL-IN SUSTAINING COSTS (AISC) will be significantly lower. So, even though these two gold miners may make the same profit, one BRAGS about its low AISC because it deducted 40% of its revenues from its costs.

      Nice trick.


  9. Chris in Arkansas | August 2, 2018 at 11:37 am |

    Great article! I’m going to have to re-read it a few times to make sense of some of the numbers. Coming at this topic from the complete opposite direction, how do should we evaluate mining companies to determine who has the most efficient operations and best chances for success in the future? What are the key data points and trends a new-to-mining investor like me should be looking at? I’d like to start positions at the bottom of the cycle and am not sure how to research mining stocks, especially gold/silver miners.

  10. ” Unfortunately, you aren’t doing your own thinking as it pertains to gold mining financials.”

    You’re entitled to your opinion but you are way off base regarding Goldcorp. Don’t care about their free cash flow in the past. Garafalo has cleaned house. Goldcorp is a great play on the price of gold cause it’s the low cost producer, will have no debt in 2 years and their mines are relatively new. Penasquito is a very big mine and may end of producing 1.0 million ozs. of gold at a negative $1000 cost. Think I’ve done my homework.

    • norm lasky,

      With all due respect, you are regurgitating the same sort of financial accounting as what the Shale Oil Industry Investor Relation departments have done to the market. The U.S. Shale Oil Industry is a complete disaster, and only a small handful of analysts understand this.

      I tried to provide you information that Hecla also posts a very low CASH COST of $4.00 an ounce, but the company is struggling to make money. You fail to understand that GoldCorp spent $144 million more on CAPEX than they made from Cash from operations in the first half of 2018.

      While it might be true that the CEO and management are trying to clean up the financials at Goldcorp, it doesn’t change the fact that the GOLD MINING INDUSTRY as a whole is spending more money to produce gold than the market realizes.

      Lastly, I still believe the Gold Miners will be the few BRIGHT SPOTS in the future when most everything else is selling off.


  11. GG capex spending in the first half of 2018 was driven by huge cost reductions projects – i.e. recovery from waste water of 100k ozs of gold and 5 million ozs of silver per year – benefits will be realized in the 4th qtr. of 2018.

    Thank you for your comments. You seem to know it all. I’ll take that into account down the road. I’m sure some of your
    readership looks for opposing points of view.

    • norm lasky,

      Yes, some of what Goldcorp spent in CAPEX spending will show up as more Profits and Free Cash flow in the future. I get it. Also, I am not a KNOW-IT-ALL. However, as I mentioned in the article, I like to look at a SECTOR or INDUSTRY over a long period of time to see the fundamentals.

      Now, Goldcorp did spend a lot of CAPEX early on (1998-2008) to add mines, build projects and increase production. Thus, Goldcorp’s gold production increased significantly from 179,000 oz per year in 2000 to 3,464,000 oz in 2015. However, production declined to 2.6 million oz in 2015.

      Now, I know Goldcorp is hurting because it is only paying $60 million a year in Dividends when it was paying four times that much, $488 million, in 2014.

      Furthermore, Goldcorp’s Free Cash Flow from 2015-2017 was a net $454 million. Not bad. However, Goldcorp produced nearly 9 million oz of gold during this three-year period. If we divide $454 million by 9 million oz of gold, Goldcorp netted a $50 an ounce in Free Cash Flow. However, Goldcorp also paid out $529 million in Dividends during that three-year period.

      So, if we also consider the dividends that Goldcorp paid to its shareholders ($454 million Free Cash Flow – $529 million Dividends = -$75 million), the company didn’t make any money producing gold from 2015-2017.

      Norm, if we look at these figures, and realize that Goldcorp lowered its DIVIDENDS to its shareholders from $488 million a year down to only $60 million, this provides us more evidence that they are NOT A LOW-COST PRODUCER.

      Norm, while you may perceive me as being BLUNT, I am trying to show the OTHER SIDE of the Story that the Gold Mining Industry, or even the Shale Oil Industry does not want the investor to see.

      IMPORTANT FACTOR: Even though Goldcorp is not making much money TODAY, it will be one of the few TOP PERFORMING STOCKS to own in the future because it produces a lot of GOLD & SILVER.


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