(Kitco News) – After seeing gold prices plummet in 2013 and with gold miners battling high operating costs, gold companies find themselves with razor thin profit margins with the ounces they’re pulling out of the ground.
The cost to mine and produce an ounce of gold, on average, ranges from $1,100 to $1,250.. Some mines produce gold at a very affordable cost while others are now producing gold at costs that are higher than the metal is valued.
As gold rose to over $1,900 an ounce in the fall of 2011, the general thought process that accompanied the rise was that gold miners were reaping enormous profit margins.
Not so, said Peter Gray, managing director of Headwaters MB, a US-based investment bank. “Everyone thought at $1,600, $1,800 and $1,900 gold (that) all the mining companies were making profit hand over fist, but, the reality is that the capital costs of construction had escalated so significantly that the margins of production and the margin of operation were still tight,” Gray said.
“$1,300 is not a sustainable gold price. In the long term, I think it’s good that this correction happened, but for the immediate future of gold there’s going to be some systemic changes that will result as a consequence of this price environment, no question.”
On Friday April 12 and Monday April 15, gold suffered its biggest drop in 33 years plummeting over $200 an ounce in two sessions. As of press time, spot gold was currently trading at 1389.60.
“You’ve got to look at it a mine-by-mine, company-by-company basis,” said Brent Cook, geologist, and founder of the mining newsletter, Exploration Insights. “At $1,300 gold, there are a lot of mines that are cash flow positive and if you just burn those out, things should be fine.
“But, the problem is every ounce they mine to stay in business, they need to replace it,” he said. “You’ve got these different cost structures, these different numbers that companies use, from cash cost to all all-in cost, etc.”
There is no concrete all-in cost figure that covers mining an ounce of gold in the mining industry as some companies report all-in sustaining costs and others report a less complete cash cost.
Goldcorp Inc. (TSX: G)(NYSE: GG), a leading global gold producer, is one of the companies that report all-in sustaining costs per ounce. Citing the company’s 2013 first-quarter results, all-in sustaining cash costs totaled $1,135 per ounce.
The all-in sustaining cost metric is a tool for measuring the actual cost to mine an ounce of gold and is being ushered into the gold mining industry.
“The all-in sustaining costs was well received by the seniors because it demonstrates that we’ve been trying to show different stakeholders that our cost is not just taking the material out of the ground, it’s much more than that,” said Brent Bergeron, senior vice president of corporate affairs for Goldcorp. “We’ve been pushing this initiative through the World Gold Council and most of the members that are there are the seniors, so, you will get a lot of them saying that it is important, because we believe over the long run that is the most important figure that you can give.
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