Costs are becoming an growing concern for gold miners across the world even while they are rolling in cash as profits soar on the back of record bullion prices.
While the high price of silver, copper and other by-products of gold extraction have kept operating costs in check, miners are worried that capital spending on new projects will become unmanageable as labor, steel and energy costs keep pushing higher.
On top of that, gold miners have also suffered as the Canadian dollar, Australian dollar, Chilean peso and Mexican peso have strengthened against the U.S. dollar. Sales of most miners are typically denominated in U.S. dollars, while costs are often based in local “commodity” currencies.
“The costs of the industry have come up fairly dramatically over the last 10 years, such that the average cash cost for the industry is getting up towards $600 an ounce and that’s not counting capital investment, financing and the other costs on top,” said Greg Hawkins, chief executive of African Barrick Gold (ABGL.L: Quote).
“The all-in costs for the industry are getting up to $800, $900, even close to $1,000 for certain companies,” said Hawkins, while speaking at the Reuters Global Mining and Steel Summit in London this week.
OF GEOGRAPHIES AND GRADES
With big gold deposits getting harder to find, majors are forced to go further afield to replace and expand the size of their reserves and output. But this growth often comes at a higher price.
“This is a tough business and companies are going to have to go into parts of the world that they weren’t contemplating going into 20 years ago,” said Sean Boyd the CEO of Agnico Eagle (AEM.TO: Quote), which owns a gold mine in the Canadian Arctic.
“If you look at the sector, a lot of the flagship deposits that were the mainstays in the 90s are no longer there,” said Boyd, who participated in the Toronto-leg of the Reuters Summit. “The sector in 2010, produced as much gold as it did in 2001, even with the dramatically higher gold price.”
The price of gold has roughly quadrupled over the last decade — spot gold XAG= touched a record of $1,447.40 an ounce on Wednesday, while silver at $38.13 an ounce is at a new 31-year high. The surge in bullion prices is being driven by inflationary concerns, political turmoil in the North Africa and the Middle East, the European sovereign debt crisis and other issues.
Ironically, the higher price of gold is one of the factors that pushes up average mining costs within the industry, as many miners look to tap easily accessible low grade material that is more costly to process and that would have in been ignored in the past, when gold was trading at a lower price.
Aaron Regent, the CEO of Barrick Gold (ABX.TO: Quote), notes that while this impacts cash costs per ounce, it is a low cost way of growing net asset value per share.
“When it comes to looking at costs, part of what’s helping us get to the 9 million ounces (annually) is satellite deposits around existing infrastructure,” Regent said at the Reuters offices in Toronto. “These are lower grade – so they are higher-cost ounces, but the capital costs of actually developing these are really small.”
CAPEX COSTS RISE
Barrick and Goldcorp (G.TO: Quote), jointly developing the massive Pueblo Viejo project in the Dominican Republic, have already indicated that capital expenditure costs on the project are going to be 10 to 15 percent above the prior estimate of $3.3 billion to $3.5 billion.
Barrick, the world’s largest gold miner, has also said costs to build its Pascua Lama gold-silver project will be about 10 to 20 percent higher at $3.3-$3.6 billion, due to a stronger Chilean peso, along with higher labor and commodity costs.
Nick Holland, the CEO of Gold Fields (GFIJ.J: Quote), notes that miners face, “What might be a very difficult year across the planet in terms of costs.”
“The oil price, the steel price, the price of timber the price of cyanide and the price of even labor is not within our control,” he said. “If these exogenous factors continue to prevail over the balance of the year, I think all of us in the mining industry will be recalibrating our cost profiles.” (Additional reporting by Julie Gordon, Pav Jordan in Toronto, Eric Onstad in London and Ed Stoddard in Johannesburg; Editing by Frank McGurty)
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