Controllable cost cutting
Gold miners have already slashed costs that are under their control. Most controllable cost-cutting isn’t coming from process or efficiency improvements, which are stickier. Miners have made major cost cuts in capital expenditures and exploration budgets.
Some miners have been a bit too hard on costs and have cut exploration costs, which could dent their growth prospects going forward. Some of the cost cutting is from high-grading of mines, or mining the higher grade portion of a mine first. This could be detrimental to mine life in the long run.
Non-controllable costs come to the rescue
Non-controllable costs, including local currency depreciation and cheaper oil prices, also helped miners lower costs considerably last year. According to a 2015 survey by Gold Fields Mineral Services Ltd. (or GFMS), most of the decline in cash costs for 2014 compared to 2013 was due to weaker local currencies and fuel, while the cost of labor and power increased.
The truth behind cost cutting
Newmont Mining (NEM) reported an 18% year-over-year decline in all-in sustaining costs (or AISC) in 1Q15. Costs declined from $1,035 per ounce to $849 per ounce. However, 30% of the cost improvements were due to lower oil prices and a favorable Australian dollar exchange rate. Another 15% savings was due to capex cuts because of the timing of the projects.
The same logic can be applied to Kinross Gold (KGC), which reduced its AISC by 3.7% year-over-year, from $1,001 per ounce in 1Q14 to $964 per ounce in 1Q15. The majority of its mine production comes from Russia. The depreciation of the Russia ruble against the US dollar led to the majority of the cost gains.
Goldcorp’s (GG) 1Q15 AISC increased by 6.3% year-over-year, from $828 per ounce to $880 per ounce. The increase would have been more pronounced had the company reported costs on ounces of gold produced rather than ounces sold.
So it seems that most of the low-hanging fruit has already been taken as far as cost cutting is concerned. To realize any upside from here, gold miners will have to explore stronger, stickier options.