Gold mine production costs up by 17% in 2006 while output fell

The mine cost of producing an ounce gold increased sharply in 2005 to $317 an ounce, while world output fell according to gold consultancy GFMS in its latest annual survey.
Author: Rhona O’Connell
Posted: Friday , 13 Apr 2007

LONDON - In its latest annual survey of the gold market, GFMS Ltd reports that global mine production cash costs rose by $45/ounce, or 17%, year-on-year to $317/ounce. The increase in cash costs was roughly twice the size of those experienced in 2004 and 2005, with much of the increase largely beyond miners' control (energy prices, for example, although it is arguable that some of this may have been hedged by some producers). Global output was down by just over 3% to 2,471.1 tonnes from 2,550.5 tonnes the previous year, to register the lowest since the 1996 level of 2,375 tonnes. Looking back over the past ten years, the peak year for production was 2,645.0 tonnes in 2001, a range of just 270 tonnes or 11%.
Total costs were $62 higher, at $401/ounce against $339 in 2005. The average gold price for the period was $603.77, and in 2005 the annual average price was $444.45/ounce, meaning that the differential between the average price (which is not necessarily the price received) and total production costs in 2005 was just over $105/ounce in 2005 and just less than $203/ounce in 2006. Depreciation costs rose by almost 24% or $16/ounce, to $84/ounce.
GMFS details local currency cash margins for the "Big Four" producing regions. In South Africa the margin was 58% of cash costs; in Australia, 85%; Canada, 87%; and in the United States, 69%. The increases in cash margins by comparison with those registered in 2005 were 190%, 73%, 41% and 49% respectively.
The increases in costs were most notable in North America, with cash costs soaring by $80 (29%)in the United States and $66/ounce (26%) in Canada. The rise in Australia was broadly in line with the global average while that in South Africa was the smallest rise among the major costed regions, which cover 1,362 tonnes or 55% of the global total of 2,471 tonnes. GFMS notes that with few exceptions producers have emphasised the challenges of increased procurement costs of essential infrastructure, including diesel, tyres and extraction reagents. Costs of contractors and skilled workers have also been on the increase a result of the boom in the mining industry, and there is of course a kickback from the increased gold price in the form of higher taxes and royalties.
The boom in the mining sector may have pushed certain input costs higher, but there is also a beneficial side-effect in the form of by-product credits. GFMS cites Chile as a good example of this phenomenon, where the net cash cost fell by 2% as a result of the substantial increase in silver prices that were credited to the accounts of both El Peñon (Meridian Gold) and La Coipa (Mantos de Oro and Goldcorp).
GFMS produces a detailed cost curve covering cash and total costs for both 2005 and 2006, which shows that the lowest decile in the cash cost curve (including royalties and production taxes) stands at 0 and below, while the ninth decile tops out at between 0 and 0, roughly level with the average price for 2005. The curve peaks at just below 0/once for both cash and total costs.
In terms of output Indonesia registered the heftiest fall, dropping from 166.4 to 114.1 tonnes, with the majority of the fall coming from a sharp contraction at Grasberg, where output has been patchy for the last four years. The drop last year had been expected as, in accordance with the mine plan, there was a sharp decrease in the grade of ore treated.
The United States registered a fall of 10.5 tonnes, with the Barrick / Rio Tinto joint venture at Cortez responsible for the majority of the contraction as a result of processing lower grade ore than previously. The fall in Canada was 15.5 tonnes to 104 tonnes, a 20-year low, with the largest fall at Goldcorp's Red Lake, also a result of lower grades. Australia slipped by 18 tonnes to a 14-year low and dropped behind China to be the world's fourth largest producer. Part of this was due to a severe cyclone at the start of the year, while technical difficulties and scheduled lower grades were also contributory factors.
Elsewhere there were increases in Latin America overall, while all the other geographical regions posted reductions. Once again, the spotlight falls on China. As well as a voracious appetite for the consumption of natural resources, China is rapidly developing its mining industry and recorded gold production in 2006 rose by 17 tonnes to reach 247 tonnes in 2006. This was partly due to an upward re-assessment of undeclared informal production. The National Development and Reform Commission has outlined a production target of 1,300 tonnes for the current five-year plan (2006 - 2010).
Finally, in the detailed study of de-hedging activity in 2006, GMFS notes that Barrick Gold was responsible for 272.8 tonnes of dehedging, with Newcrest reducing its hedge position by 39.4 tonnes and AngloGold Ashanti by 21.1 tonnes. These were the only three companies to reduce their positions by more than ten tonnes during the year. Net dehedging for the year as a whole amounted to 373 tonnes, meaning that net mine supply into the market in 2006 was 2,098 tonnes against a net 2,3464 tonnes in 2005.