Between September 2012 and December 2013 the average monthly price of gold dropped 29%. Its worst fall in 30 years.
A famous quote from Warren Buffett which springs to mind is: "Only when the tide goes out do you discover whose been swimming naked." In recent times, it appears Newcrest Mining Limited (ASX: NCM) has been swimming naked.
Despite being the biggest gold miner on the ASX, Newcrest does not have the best cost base and when the gold price fell to around $1220 per ounce, it felt the pain of small margins. One way to value gold stocks and their ability to benefit from higher prices is to work out the costs associated with their mining activities. Newcrest has an 'All-in Sustaining Cost' (AISC) of $1,284 per ounce (Note: that is in Australian dollars and taken from its 2013 annual report).
Kingsgate Consolidated Limited (ASX: KCN) is a gold mining and exploration company with operations in central Thailand and South Australia. It has an AISC of US$1,055 per ounce and is forecasting production of between 190,000 and 210,000 ounces from its newly revamped operations.
OceanaGold Corporation (ASX: OGC) shares jumped last week on the release of its fourth quarter and full-year production report. The company achieved a record gold production of 325,732 ounces in 2013, ahead of guidance. What made it such a good result was the AISC, which came in at $868 per ounce – substantially lower than Newcrest and Kingsgate.
Maintaining a good balance sheet is imperative for any business that wishes to pay a sustainable dividend and invest when opportunities arise. That's exactly what Northern Star Resources Ltd (ASX: NST) has done. It recently announced an equity raising to fund the acquisitions of both East Kundana JV and Kanowna Belle in Western Australia. Although the company didn't report its AISC per ounce, it claims to have cash costs of $680 per ounce. This includes production costs at the mine site but does not include off-site expenses such as head-office costs, depreciation, capex, smelting, taxes, debt etc.
Foolish takeaway
Now is the time to be looking at gold miners who took a beating during the price drops in 2013. Although costs play a big part in determining which companies will succeed under what prices, there are additional criteria gold investors need to consider, such as available reserves, cash flow, mine life and exploration.
