According to Mining News Pro - While retail investors are often impressed by high-grade mines that crank out the ounces, they should realize that gold-mining is like any other business: revenues must exceed costs.
Mining costs rose steadily through the 2000s which should have hurt a lot of gold miners. But it didn’t. In 2001 when the gold price was just $272/oz, gold mining companies had cash costs of $176 an ounce, giving a 54% margin. However, by 2006 the gold price climbed into the $600 an ounce range and miners were losing money. Fast forward to 2012, when the average cash cost was $719/oz – 184% higher than 2006.
Working with the World Gold Council, senior gold companies came up with a new standard to measure costs: all-in sustaining costs (AISC). AISC includes not only the direct costs to mine gold (machinery, processing, power, labor, etc.), but G&A expenses, exploration, reclamation and sustaining capital. It does not include project capital, dividends, taxes and interest payments.
Even so, AISC considerably tightened gold companies’ margins. Of the seven large gold firms, the average AISC in 2012 was $1,046 an ounce, but the gold price was sitting at a very healthy $1,675 at the start of 2013 – yielding an average margin of 60%. However, 2013 was also the year the gold price slid to $1,233 – a drop of over $400. At this point gold miners entered a period of pain; many sold assets, cut staff and took billion-dollar write-offs on properties as their stock prices plummeted.
The point is, costs matter. And they’ve continued to go up. According to New York-based CPM Group, margins have squeezed as all-in sustaining costs have grown 22% since the gold price bottomed in 2016.
Cost factors
Production numbers from gold mines are meaningless if costs aren’t given. Investors need to understand some of the factors that go into gold mining costs, so they are able to ask the right questions and break down these costs, in order to dive deeper into the total AISC that is usually given. These include: depth of deposit; strip ratio; open pit vs underground; labor; infrastructure; and recovery method.
Open pit vs underground
Of utmost importance to the cost of extracting gold is where the gold lies within a deposit. A deposit of disseminated gold (small particles of gold distributed throughout the rock) close to surface will be open-pit mined, while gold found in often-thin veins hundreds of meters below surface is mined using underground methods. There are many more low-grade gold deposits than high-grade. For every 2.5 grams per tonne (g/t) gold deposit, Mother Nature forms another 10 deposits around 1 g/t. Generally speaking, one gram per tonne works for open-pit mines, but underground gold mines require at least 2.5 g/t to be economic.
Open-pit mining is either done with a fleet of haul trucks (some now automated) or an in-pit crushing and conveying system (IPCC). Underground mines are accessed via a shaft or ramp. Miners extract the ore through various methods using specialized equipment that operate in narrow, dark tunnels. Two of the deepest (and hottest) mines in the world are in South Africa: East Rand and TauTona.
Depth of deposit
The most famous of the world’s shallow deposits is the Carlin Trend in Nevada. Here microscopic gold is found in almost every rock. The gold is low-grade (under one gram per tonne) but plentiful. Between 1835 and 2008 a whopping 152 million ounces was pulled from the Carlin Trend and other gold trends in Nevada, including Cortez and Walker Lane, mostly through open-pit mining. Some Nevada pits are now depleted and have moved underground. The technique of heap leaching – wherein mining companies pile ore onto large piles and irrigate them with leachate – originated in Nevada where near surface ore is oxidized. The leachate percolates through the ore, thereby dissolving the gold. While heap leaching for metals has been known about for hundreds of years, it wasn`t until 1969 that the first gold and silver heap leap operation began at Cortez in Nevada. Barrick Nevada`s Cortez property is still going, with ore drawn from the Pipeline complex open pit, and Cortez Hills, a combination underground/ open pit mine.
Heap leaching technology was a major breakthrough because it significantly reduced gold recovery costs (versus traditional cyanide leaching – see section below on gold recovery costs) for low-grade but high-tonnage “Carlin deposits” such as those found in Nevada. An example of a low-cost, high-margin Nevada producer is the Marigold Mine. Owned by SSR Mining (TSX:SSRM), Marigold stands out for its ultra low grades of .46 g/t. In production since 1989, Marigold is a large run-of-mine operation. After blasting the ore, it doesn’t need to be crushed or ground and can go directly onto the leach pad which significantly reduces costs. In the third quarter Marigold reported an AISC of $965/oz, after realizing a gold price of $1,207/oz.
Strip ratio
The strip ratio is the amount of waste rock, or overburden, that must be removed in order to get to the mineralized rock (ore). The strip ratio is calculated by dividing the thickness of the overburden by ore thickness. Eg. if the overburden is 100m thick and the ore is 50m, the strip ratio is 2:1. The lower a strip ratio, the more profitable the mine will be, since less material needs to be moved.
High-grade gold contained in narrow veins that snake through the rock can only be mined by excavating shafts and hoisting the ore to surface via low tunnels (drifts). This process is expensive, because digging deep requires a lot of material to be removed around the veins so that the mining equipment can access them. Consider a typical quartz vein that is 0.5 meters wide. At minimum another meter must be added to the vein to mine it. The width is now 1.5m. But logistically, in order to drill, blast, and muck the ore, the vein width must be stretched to 3m. This means the deposit, first estimated at 10 g/t, is now only 5 g/t because the gold has been “diluted” by the waste rock. Dilution can drastically affect the economics of mining the deposit. Rock that was originally estimated at $420 a tonne is now worth $210/t – cutting the internal rate of return (IRR) and the net present value (NPV) in half.
Underground mining is highly sensitive to gold prices, considering the high operational costs.
A good example is Nova Scotia, where a long history of small-scale high-grade underground mines never turned a profit. No one thought it was possible, but Atlantic Gold (TSX-V:AGB) has shown that open-pittable, disseminated gold is not only possible but a highly profitable business in Atlantic Canada. Its flagship Moose River Consolidated (MRC) project – the first open-pit gold mine in Nova Scotia – opened just over a year ago.
The mine plan entails a very low strip ratio (0.76:1), which means every there is very little waste ore to help keep costs low and gold production high. At full build-out AGB expects to produce about 200,000 ounces a year.
At AISC of $528 an ounce at today’s gold price of $1,250/oz, Atlantic Gold’s profit margin is a remarkable $717/oz. Unlike the gold majors at the top of the mining cycle, whose mantra was “more production”, AGB is running the MRC mine like a business – keeping costs in line with revenues. Moose River generated profits of $6 million in the third quarter.
Along with a low strip ratio, the other factors helping Atlantic Gold control costs are: the mine’s close proximity to labor, suppliers and the airport; a 1.5 g/t grade; and ease of gold recovery. In fact, Atlantic Gold is currently the lowest cost gold producer. The highest-cost mid-tiers have AISCs of between $1,200 and $1,300/oz.