Well, it depends. Gold production costs vary from region to region, from mine to mine, and from company to company (e.g., whether it is a junior or a senior company). For example, gold production costs in South Africa can be more than twice as much as in Peru.
What does make up the cost of gold production? First, the mining company has to discover mineable gold deposits, conduct exploratory drilling and extensive geochemical analysis. Later, the company has to buy an exploration license and meet environmental and other regulations. Then, it can establish the site, buy all the equipment and physically extract the gold ore. And after the mine is tapped out, the mining company may be required to rehabilitate the site to pre-mining conditions. As one can see, gold production costs go well beyond the mere act of pulling the metal from the ground.
This is why we have different notions of gold production costs. Traditionally, the industry used cash cost, which focused only on the mining and processing costs incurred. But in 2013, the WGC published a guidance note on all-in sustaining costs and all-in costs metrics. The former concept is an extension of the existing “cash cost” metrics and incorporates costs related to sustaining production, while the latter notion includes all additional costs that reflect the varying costs of producing gold over the lifecycle of a mine.
OK, so what are the gold production costs and how can we use them in investing? The all-in sustaining costs were about $950 in 2017. It means that the price of gold was higher than the costs, making gold mining profitable. And the obvious investment implication is to invest in gold mining companies that do well in keeping all-in sustaining costs low.
Gold Productions Costs and Gold Prices
Last but not least, what is the link between gold production costs and the price of gold? Some analysts claim that gold production costs constitute the floor for the gold prices. They are wrong. Gold is not like other commodities which are burned or eaten. If their prices plunged below the costs, production collapses. The falling supply and rising demand (due to low prices) help the prices to recover. But that mechanism does not work with gold, as the yellow metal is not burned or eaten. It is hoarded. So when the production falls, the supply of gold does not disappear. Remember that there are massive above-ground holdings of gold. Their presence implies that the link between the production costs and prices is rather weak.
If at all, it is reversed: gold production costs follow the prices. When the price of the yellow metal increases, mining companies will invest in more sophisticated methods to extract gold and will start to operate deeper mines or lower quality ores, boosting the production costs. Just look at the data. The chart below shows the cost of mining gold for Agnico Eagle, one of the 10 biggest gold producers in the world, over time. It increased during the gold bull market in the 2000s and declined during the subsequent bear market.
Chart 1: Gold prices (yellow line, London P.M. Fix, yearly averages, in $) and Agnico Eagle’s mining costs per ounce (blue line, in $).
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