For the past five years or so, gold company costs have been rising at around 17% per year. And, while they have moderated somewhat of late and could go lower in the short term, the long term trend is definitely up.
This is according to Earth Resource Group, investment advisor, Georges Lequime, who told Mineweb’s Gold Weekly podcast that much of this increase has been driven by falling grades, with the average across the industry now below 1 gram per tonne.
Lequime explained that the fund has been tracking cost numbers since 2008, “We take the top 13 producers and we add in the project capital (because there’s always a fine line between sustaining capital and project capital because a number of these projects really are replacing current production) and we have the number at just over $1400 an ounce currently.”
But, he said, “We are starting to see from the big four, a slight increase in the grades. So there’s a certain degree of higher grading taking place by a couple of the larger companies which is giving some relief to that total cash cost number.”
He added that he has been told by the companies concerned that there has also been some easing on the labour cost inflation front, which has been running out of control over the past four or five years. And, there has also been a pull back recently in fuel prices and some companies delaying projects because of cost.
There is also, he says, “a connection between the gold price and the costs and its quite clear that as the gold price goes higher, there’s a reluctance from miners to leave ore underground that you can still make some money on on the margin, but obviously it’s much lower grade, you will go and take it through to the mill which is obviously going to push up your average costs, although you’re making some money on it. You’re just keeping a very thin margin.”
As a result of this and the other factors mentioned, he says, if current cost trends continue, the industry could well see $2,000/oz within 10 years.
The flip side of this, he says, is that the group is becoming increasingly bullish on the medium, to long term outlook for bullion prices.
Not only are projects being delayed, he says, but exploration spend has been cut 35% across the industry from this year to last, which makes the chances of finding big, new deposits even smaller.
This means, he says, “We’re probably going to get a fall in global production quicker than what we had anticipated, and that should put some pressure on the gold price.”
In terms of performance, however, he says, while gold companies have, in the main, disappointed investors, many are beginning to get the message, “they’re saying, we have to give something back to our shareholders otherwise we’re not going to be able to fund these new projects, we’re not going to be able to fund our exploration. I’m not hugely optimistic that we’re going to get a significant expansion in margins, but I don’t think we’re going to go through as poor a period as we have in the past 10 years,” he says.
Asked, what he is looking at in order to find value in the sector, Lequime said, management is more important than ever in the current market.
“One has to have a look at is who’s got the best ability to actually add value over the next two or three years, what does the exploration upside look like, who is going to control their costs the best and who’s actually going to deliver against the plan that they’ve promised.”
The companies that can do that, he says, are going to stand out from the crows and do well, “Unfortunately there are probably fewer of those companies around than I’ve seen in the last 20 years of looking at this market.”