Having said all of that, Randgold is one of the ‘better’ gold miners around. Randgold’s business model is designed to deliver gold at a low cost of production and, unlike many miners, which have been forced to write down the value of their mines as gold prices drop, Randgold’s mines are valued at $1,000 per ounce of gold contained, so the company has plenty of room for maneuver before writedowns occur. In addition, Randgold doesn’t really have large head offices and high admin costs so overhead costs have been kept low.
Rising from the ashes
One of the company’s that could benefit from the accounting change is Kinross Gold Corporation (USA) (NYSE:KGC). Kinross is a much unloved company, more so than the rest of the gold miners. The company’s stock price has fallen 62% during the past five years, compared to the Market Vectors Gold Miners ETF, which has notched declines that are half of that at only 29%. However, it is estimated that Kinross’ AISC of production was around $1,072 per ounce during the second quarter of this year. According to Bloomberg if the gold price drops below $1,300 per ounce, 30%-40% of global mine production is not cash-flow positive, indicating that Kinross is in the elite club of companies that are still cash generative below the $1,300 threshold. Barrick Gold’s AISC for the second quarter of 2013 was $919 per ounce.
Indeed, it is possible that when the market realizes how efficient Kinross is, the company could be in for a rerating.
The new AISC measure for gold miners should give investors and shareholders more clarity when it comes to miners production costs. Moreover, the measure should quickly highlight inefficient companies and allow investors to select their investments with more conviction without having to worry about hidden costs.
The article The New Metric Designed to Flush out Inefficient Gold Miners originally appeared on Fool.com and is written by Rupert Hargreaves.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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