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Gold/Mining/Energy : Gold and Silver Mining Stocks -- Ignore unavailable to you. Want to Upgrade?

To: d:oug who wrote (1630)	7/17/2001 10:13:31 AM
From: russwinter	Read Replies (1) \| Respond to of 4051

On the replacement cost issue I did reread Hathaway's classic. He talks about it some. He also aptly describes the hole the industry has dug themselves into with hedging.: usagold.com He says, "discovery cost, either exploration or acquisition is about $25/oz". I'd like to zero in on just exploration, as an acquisition could be done for less than typical exploration costs. To simplify in a model form (an "in the ballpark" way of viewing gold mining costs), we can see the threshold necessary to constitute a economically viable mine at 267 POG. Using a 15% rate of return on capital, we need to see a $40 an ounce profit (267 X 15%= $40). So total costs should be no more than $227. Using Hathaway's $25, that means operating costs and capex, minus "discovery costs" should be no more than $202. Perhaps someone can provide capex costs necessary to drive cash costs down enough to keep below the $202 number, but I'd guess $35-$50 an ounce depending on the variables. Using the mid-point that means cash costs must be below $160 if the capex hasn't yet been spent. Only about 20% of the world's mines are below that, and few exploration deposits are. See slide 16:http://www.meridiangold.com/jun2601/frame.htm So looking at existing mining operations (where capex has already been spent), it would seem that the business logic is that if you can find more gold below 227 AND keep your discovery costs reasonable (say $20?), then your threshold is 207 total costs? However, the miner still has to account for wear and tear and depreciation on his mining equipment. Some capital items like big hauling trucks, crushers, etc. have to be pretty high depreciation items. So the miner faces two challenges: replacing his capital in the form of gold, and his equipment. If I SWAGed it I'd say the economic threshold for an additional reserve at an existing operation would be under 200, maybe 195-200. If you couldn't produce it below that it shouldn't be a true reserve (in terms of a decent return on capital). If you go back to my company mine review, you will see a large chunk of these operations do not meet even modest return on capital standards. Further if existing costs are over 200 on mature previously explored deposits, what are the chances of finding it below that through new discovery, especially with slashed budgets?