UNITED STATES March 18 2014 10:35 AM
NEW YORK (Scrap Register): While industry-wide moves to cut costs have progressed at the margin, the underlying dynamics of rising gold cash costs remain unchanged, said Barclays in a Research note.
According t Barclays, marginal cash costs fell for the third quarter in a row despite a rise in the average. 2013 annual performance mirrored that of Q4 13, with a fall on the margin despite an increase on average.
As expected, the step down in gold cash costs across the curve in Q3 13 was not sustained into Q4. In our view, because the improvements were not driven by fundamental drivers, such as better grades, better technology or falling labour and electricity costs, it will remain difficult for overall average cash costs to grind lower. In Q4 13, quarterly average (50th percentile) cash costs rose 3.2%, to $675/oz, while marginal (90th percentile) cash costs fell 6.3%, to $966/oz, said Barclays.
Annual cash costs moved similarly, rising 7.2%, to $721/oz, on average, but falling 4.6%, to $1053/oz, on the margin (Figure 1). This is a trend that we expect to continue, as the underlying fundamental dynamics have not changed; likewise, room remains on the margin for producers to cut administrative costs and address their highest cost mines. Thus, our base case for gold cash costs is for average cash costs to remain stable or increase slightly, while marginal cash costs should continue to improve in the short term as producers optimize their production portfolios, the firm continued.
As for regional cash costs, the three largest producing regions in our database (US, South Africa and Australia) improved q/q on a relative basis compared with the other regions we track, despite an absolute increase in some regions. On a quarterly basis, South Africa fell from the most expensive region in Q3 13 at $928/oz to the middle of the pack in Q4 13 at $886/oz. In fact, South African quarterly cash costs improved in every quarter of 2013; however, on an annual basis, South Africa remains the highest cost large-scale producing region that we track, centered on the 80th percentile with an 2013 average cash cost of $960/oz (Figure 2).
Much of the global average cost improvement in 2013 took place in H2; thus, despite the increase in average cash costs in Q4 13, Q3 and Q4 brought down 2013 full-year cash costs. The y/y increase in annual average cash costs was in fact below the five-year average, and 2013 marked the first y/y fall in marginal cash costs in our records (our database commences in 2007 and covers about one-third of global production). Overall, 2013 was a strong year for cash cost improvement, as producers have adjusted to a lower price environment.
Ultimately, Barclays expects marginal cash costs to improve in the short term, but the room to do so is narrowing as companies continue to cut unnecessary administrative costs and optimize their portfolios for the current price environment. However, Barclays does not think that average cash costs will be able to improve, at least not to the same extent, as the underlying fundamental dynamics have not changed. Given that gold prices dipped below marginal cash costs last year after including estimated sustaining capital expenditures, Barclays thinks it is unlikely that the industry trend towards cost optimisation will come to a halt, but the slack to continue marginal cost improvements is narrowing.