Gold mines’ `hidden’ costs edging higher

If it weren’t for forward sales, more than half of North America’s top gold producers would have reported pretax losses in the first quarter, says a recent report by Yorkton Natural Resources. North American Gold Shares points out that while cash costs may seem low in relation to the price of gold received, total costs — including general expenses, exploration expenses, royalties and depreciation — are moving perilously close to and even exceeding the price at which producers are able to sell their gold. Some of the profit crunch can be attributed to the gold price which, at US$371, turned in one of its worst quarterly averages since 1986. But added costs associated with aging mines, investment in new technology, and environemtal regulations are also narrowing the gap between expenses and returns. Using a sample of 15 mining companies, the research group calculated that profit margins have fallen by more than 50% since 1987 even as production has doubled. Just four years ago, the group of 15 cleared an average of US$130 for every ounce of gold they produced. By the end of 1990, the same producers were banking only US$56 per oz. Four of Canada’s top producers, LAC Minerals (TSE) and subsidiary Bond International Gold (NYSE), Galactic Resources (TSE) and Agnico-Eagle Mines (TSE) are among the worst performers. When total costs, including depreciation, are taken into account, they were all losers in the first quarter. Agnico, suffering from a combination of high costs (US$478 per oz.) and a low selling price (US$364 per oz.), racked up a whopping deficit of US$114 per oz. Still, with the help of its large, high-grade Hemlo mines, Canada is holding its own as a relatively low-cost producer. In 1990, the average Canadian cash cost was US$248, compared with US$265 per oz. for the Western world. Total costs averaged US$313 per oz., compared with US$353 per oz. for the world’s largest gold producer, South Africa. Overall, Canadian mines experienced a modest 1% rise in cash costs in 1990. According to Gold Fields Mineral Services’ 1991 gold report, a 2% reduction in total costs resulted from a slowdown in development and consequently, lower depreciation charges. Forward sales, which allow mining companies to lock in future production at a pre-determined price, have helped many producers stay afloat in a drowning market. An extreme example is American Barrick Resources (TSE), which is almost fully hedged at US$440 per oz. until 1995. But as long as producers continue to sell gold forward, every time the price moves up, gold is likely to remain weak and profit margins thin, says Yorkton’s Peter Miller.