Mq:
I have been looking for historical average production costs for the gold industry for some time. Tonight, I finally found what I have been looking for. There is a wealth of data at this site: brookhunt.com developed for clients like Goldman Sachs. Click on Gold, Presentations and you will find all you need to know about gold production, production costs and the implications for future gold price.
Here are a few tidbits:
"Western World gold mine production increased from 941 tonnes to 1,903 tonnes between 1980 and 1993, an average rise of 74t/a (5.5% per annum). By 1993, the rate of annual increase had fallen to 1.4%, and falls in production were recorded from 1993 to 1995. Growth subsequently resumed, and since 1996 annual production has grown at between 3.5 and 4.0%."
"During 1998 Western World weighted average gold mine cash costs fell dramatically relative to the previous year, from 247 to 202 dollars per ounce, an 18% reduction year-on-year. In fact, costs have been steadily falling in real terms since the beginning of our data series in 1975. This graph shows Western World average C1, C2 and C3 costs back to 1980, rebased into constant 1998 dollar terms. In real terms, C1 costs have declined by an average of $13/oz per annum over the period, but even so, the 18% fall in costs last year was unprecedented. The largest year-on-year reduction previously seen, in 1985, was 16.5%. This was mostly down to a big South African Rand devaluation, at a time when South Africa was still producing 55% of the World’s gold. Without going into detail, this enormous cost reduction in 1998 was achieved by several means, but was mainly a result of the strong US dollar relative to the currencies of the other major producing countries. This accounts for roughly half of the cost reduction seen. The other half was the result of reductions in local money costs, higher ore grades, and reduced stripping ratios. Miners reduced their mining, processing and other production costs however possible, through lay-offs and strict cost control generally, and as the figures show, they succeeded in a big way."
"The gold mining industry has battled with constantly declining margins for over fifteen years; the rate of decline has been around $7/oz per annum in real terms. Despite the fall in costs in 1998, gold miners’ margins, including hedging revenue, were barely up on 1997. On a cash, or M1 margin basis, average margins fell from $142 per ounce in 1996 to $122 per ounce in 1997; recovering slightly to $126 per ounce in 1998. Hedging and forward sales allowed gold miners to realise a price $35 per ounce above the spot level on average."
"So what would happen if the price were to fall further in the near future? For a possible answer I decided to look to the copper industry, which has suffered much greater margin pressure at times of low prices, than the gold industry has so far, as shown by this graph comparing average total cost margins for the two metals. M3 Margin Mines do not immediately cease production at the moment at which they become loss-making on a cash cost basis. In the early 1980s, copper miners endured a period of low prices during which the price fell to such a level that at the price trough in 1982 only 51% of Western World copper mine production was making a cash profit. Once more in 1984, copper prices fell to a point where only 73% of production was making a cash profit. At that point, sufficient mine capacity closed down to restore market balance. Could this be the precedent followed by the gold mining industry? If it were, then prices would fall to $200, the point at which 50% of mines would make cash losses. We estimate that at this price level some 30 to 50% of loss-making production, that is roughly 300 to 500 tonnes of gold, would close down. As a result, the cost price relationship would re-stabilise."
"So what about future production ? Well because of the strong correlation between the gold price and costs of production as previously shown we can draw inferences about prices from our cost forecasts. If prices fall, high cost mines close, at least in theory, restoring the cost
price relationship by reducing the average cost of production. The white lines represent the average C1 cost of production at the lower quartile, median, upper quartile and ninth decile, year-by-year from 1975. The gold price is superimposed on this, to show the relationship between the industry cost structure and price. In most years, the annual price range is close to, or intercepts the ninth decile of production costs. This was the case in thirteen out of seventeen years between 1982 and 1999. In three of the exceptional years (1983, 1985 and 1994), the ninth decile was less than 10% lower than the lowest price for the year."
"The forecast cost structure implies that if the price remains between 270 and 325$/oz there will be little pressure for gold mines to close."
"The forecast cost structure implies that if the price remains between 270 and 325$/oz there will be little pressure for gold mines to close. At a price of 250$/oz significant additional capacity is threatened with closure; 282t of capacity has negative margins and negative NPVs and 573t has positive margins but negative NPVs. In total therefore, 819t, amounting to 45% of operating capacity is vulnerable to closure at a gold price of $250/oz. It would appear then that the $250-280/oz interval represents a watershed in mine vulnerability. One might infer that this is the price range within which significant closures will become likely, particularly over a longer time frame."
"Having considered the downside, what prices are required to prompt production growth?"
"How much new capacity can we expect to be brought into production? For each project we have calculated the gold price required to generate a 12% pre-tax internal rate of return (IRR). This shows that at $300/oz under half of the potential capacity can generate this relatively modest rate of return and at a gold price of $350/oz only 255t, just over half of the project capacity, generates a 12% IRR. It would appear then that many of the projects identified are not attractive development prospects below $300/oz and may, therefore, not be developed in the near term. In fact, many are on hold, awaiting higher prices. If the gold price remains at current levels, i.e. between $280-320/oz, we expect that production lost by natural attrition, due to reserve depletion, will be offset by limited new project development. Higher gold prices are required if growth in production is to continue at the rates seen over the last few years." |
