Gold News

Mining Costs and the Gold Price Floor

Costs have risen across the gold mining industry in recent years...

OWING TO the rising cost of labor, energy and raw materials, the average cost of mining an ounce of gold across the industry has risen considerably in recent years, writes Ben Mountifield of 247bull.com.

As a result there is a natural floor under the price of gold at around $1300, and for some producers the number is nearer $1800. 

The price of gold has risen every year for the past 11 years (this looks set to be the twelfth). However so too has the cost of producing gold. According to the Thomson Reuters GFMS's Gold Survey 2012, the average cost across the Gold Mining industry for mining an ounce of gold is $727 per ounce.

As the chart below shows, the cash cost per ounce of production, or simply the "cash cost", has risen inexorably along with the price of gold.

Chart showing the relationship between the rising gold price & industry cash costs 

Source: Thomson Reuters GFMS

A number of factors have contributed to this cash cost escalation, including lower cutoff grades, higher energy prices, higher wages, higher capex costs and increased environmental regulation.

The $727 per ounce figure includes only those costs directly associated with the production of the gold. These include the cost of the workers (miners and company management), the energy used (diesel in the heavy machinery, etc.), raw materials such as steel, specialist products such as explosives and cyanide (if heap leach mining is used), and taxes. 

However there are many other costs aside from those associated with mining and processing ore into gold. Operating a mine over the long-term, such that it doesn't simply run out of minable ounces, requires large ongoing expenditure on exploration activities such as surveying and drilling. New deposits must be found and then defined with an extensive drill programme. The site must then be prepared them for production. There are also costs associated with removing waste from open pit mines to allow for future production.

As the chart below shows, these costs are rising and the number of ounces being discovered is declining.

Gold exploration spending & declining discovery rates

Source: Metals Economics Group, Intierra and Barrick

The total all-in cost of mining an ounce of gold across the industry is currently around $1300 and for some producers it is considerably more. For example, it costs Gold Fields, which is one of the world's largest producers of gold with annualized production of 3.5 million gold equivalent ounces, $1788 an ounce.

If the gold price were to drop below $1300 (and in some cases a much higher number) for an extended period, it would simply be uneconomic for many gold producers to remain in production. 

Rising production costs have therefore put a natural floor under the price of gold at around $1300 an ounce.

Get the safest gold – securely vaulted in your choice of location – at the lowest possible price on BullionVault…

Providing analysis of critical economic events and market trends, the 247Bull.com website aims to give investors a complete picture of the global financial landscape so they can better protect their wealth and profit.
 
See the archive of 247Bull articles here. 

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn

 

 

scri

Market Fundamentals