Economics of a Gold
TOM BUTCHER: Joe, could you tell me a little bit
about the economics of running a gold mine?
JOE FOSTER: Gold
companies typically design a mine to last between 10 and 15 years. That's the
mine life that you can expect out of a gold deposit. Companies generally select
a gold price to design the mine around, and this price is usually below the
prevailing gold price. For example, if gold's trading around the $1,300 level,
the company might design the mine around a $1,100 gold price. That ensures that
the mine remains profitable, and if there is a drop in the gold price, then of
course the mine can sustain itself. Some mines are more profitable than others,
and that's largely a function of grade. Management can be the same; it's not a
reflection on the skills of management. But higher-grade mines tend to be more
profitable, simply because they're richer and in higher-quality ores. In 2013,
we saw a major revision in the mine plans of several mining companies. Mines
are redesigned yearly if they need to be, and with the collapse of gold in
2013, we saw widespread revisions. Today, the industry is geared at a $1,100
gold price in terms of mining plans, with all-in sustaining costs for the mines
at approximately $920 an ounce.
BUTCHER: How do gold mining
companies control costs?
FOSTER: There are a number of sources of
costs in the mining industry. About 40% of costs is labor and contractors, and
that number is split between the twoIf you have a larger workforce, you don't
need as many contractors, and vice versa. About 20% is energy costs, and the
remaining 40% is miscellaneous costs like tires and chemicals, belts, carbon;
all the materials it takes to run one of these industrial operations. All-in
mining costs have declined recently, over the past several years from about
$1,100 an ounce to closer to $900. To control these costs, companies are using
better, more efficient mining methods. The problem with the industry a few
years back, when the gold price was higher, is they were concentrating on
growth projects and not paying enough attention to the mines. Mining costs got
out of control. Now they have re-implemented better mining practices to rein in
costs. They have also negotiated better pricing levels with contractors and
suppliers to control costs.
Another cost center that we focus on
is development costs, and this is another area where companies have achieved
significant savings. Many miners have been able to reengineer projects. In the
recent past, projects were really too big. Companies were designing projects to
produce the maximum amount of ounces, not the maximum amount of profits. Now in
this low price environment, they've reengineered projects to make them smaller,
to require less capital, and to be more profitable. Not only are gold mining
companies saving capital, they're generating better profits with streamlined
projects. Those are the big savings we've been seeing over the last couple of
BUTCHER: Are there any other costs worth discussing?
FOSTER: There are costs that miners just can't control. These include
energy costs. As you know, the price of crude oil is down now. The price of
diesel, fuel oil, and electricity are lower than they were a few years ago, and
that is helping mining companies quite a bit. Also, currencies are down around
the world. If you look at the Australia, Canada, South Africa, and Mexico, for
example, their currencies have dropped between 20% and 50% over the last
several years. Gold mining is a U.S. dollar-based business, and they get
revenue in dollars, yet most of their operating costs are in local currencies.
This in effect drives their cost down in U.S. dollar terms.
BUTCHER: Does the cost structure you have just described provide both
mining companies and investors with good leverage to the gold price?
FOSTER: That is a good point. Actually, even though miners are generating
cash at these levels, most of that cash is going back into exploration, new
project development, dividends, G&A [general and administrative corporate
costs]; so most of the cash is being consumed.
There is very little
free cash at these gold price levels. If we get an incremental increase in the
gold price, we will see some tremendous operating leverage, where miners are
able to generate much more free cash at higher gold prices. Of course, this
works in reverse. Gold prices are low, and if they go even lower, say down
towards the $1,000 level, I think we'll start to see some of the unprofitable
mines shut down, and obviously that would not be great for gold mining
BUTCHER: Thank you Joe.
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