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GOLD ANALYSIS
Total cash cost increases were well contained in 2009 - but long-term sustainable costs are nowhere near as comfortable
Author: Rhona O'ConnellPosted: Wednesday , 14 Apr 2010
LONDON -
This year's Gold Survey from GFMS Ltd shows that China was again the world's largest mine producer of gold in 2009, with output of 324 tonnes, an increase of 11% over the previous year. South Africa, for so long the giant of the industry, ranked third behind Australia; while Australian output increased marginally to 223 tonnes, South African output fell again to 220t after 234t the previous year. The majority of the other major producers also registered increases, with the notable exception of the United States, which saw a fall from 234t to 219t.
Overall world mine production increased by 163 tonnes to a total of 2,572 tonnes, thus reversing three previous years of production declines.
The increases in China have been driven by a number of factors, notably rapid commissioning of small-scale (and low-grade, high-cost) operations in response to high prices and low labour costs. Official support of the sector, especially as a knock-on from the base metals sector, has been instrumental in raising output as has continued market consolidation through merger and acquisition. In stark contrast to the discrete nature of the industry only a few years ago, GFMS reports that official statistics now ascribe almost 40% of domestic gold output to the country's five largest producers. The industry is becoming more geographically diverse, and while the eastern provinces continued to dominate gold production, more than one western province is making rapid headway.
On the other side of the world the fall in production in the US came from a number of different operations spearheaded by lower grades and heightened waste stripping at Barrick's Goldstrike (11 tonne reduction) while reduced tonnage and a fall in the amount of ore leached generating substantial falls at the consolidated Newmont Nevada operation. These falls, and a number of reductions elsewhere, were partially offset by significant gains at Rio's Bingham Canyon mine, which generated a seven-tonne increase in gold output due to increased mill throughput and a shift in targeted zones in response to shifts in metal prices.
Global cash costs of production are estimated at $478/ounce for 2009, a 3% increase on the previous year. Input cost inflation continued to exert upward pressure on costs although this was offset to a degree by exchange rate movements in the first half of the year, along with lower fuel costs. On the other side of the coin were lower grades and higher strip ratios. All-in costs are estimated at more than $700 per ounce, while GFMS believes that the "true", fully-loaded sustainable long term cost of production (not allowing for return to shareholders) was substantially higher than this.
As well as a global average all-in cost breakdown chart, the Survey contains a fascinating chart that strips out the different variables in a cost model and quantifies them for the differential between 2008 and 2009. Parameters include (but are not restricted to), for example, grades, labour, strip ratios, duel, exchange rates etc. Some of these variables increased and some fell, and the distillation of the model results in an increase of $14/ounce to $478/ounce for total cash costs in 2009 over 2008. Elements that helped to keep dollar cash costs down were weaker currencies in many producer currencies, notably the Ghanaian cedi, the Russian rouble, and the Mexican and Argentinean pesos. Australia and South Africa were also marginal beneficiaries. Falling fuel prices also helped to reduce production costs, as did by-product credits at primary gold mines.
Other variables that drove costs higher include the reduced average head grade at primary gold mines. The Survey suggests that throughput rates had been maximised and cut-off grades reduced in order to benefit from higher gold prices at the expense of higher costs. Labour rates, which GFMS estimates are the highest component of mine site costs at approximately 35% of total, again put upward pressure on costs as did the higher strip ratio at open pit operations, along with reduced recoveries at mills that had heap leach plants Power also exerted a small upward pressure on costs.
GFMS Mine Economics, part of the GFMS Group, has developed an "all-in" sustainable cost model, which takes account of the costs necessary to develop and sustain mining operations, which is arguably more useful than the others as a measure of "real" industry margins. This includes other variables such as head office overheads, interest charges, mine site exploration expense, extraordinary charges and sustaining or on-going capital expenditures. The survey suggest that roughly 12% of the mines analysed had all-in costs last year that were above the annual average gold price - but these operations only accounted for 6% of global gold production. The figure generated for 2009 is high enough, as the Survey puts it, to be "a sobering thought when one remembers that this figure does not allow for any return to shareholders".
Gold prices may be pleasantly high at above $1,100 for now, but the longer term picture may suggest that miners will need to be prudent housekeepers in the medium term.
Mineweb - Mines face high long-term sustainable costs- GFMS - GOLD ANALYSIS
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