It’s still a margins game

It’s been thrilling for gold producers and investors these past couple of years, watching the average gold price climb from US$363.32 per ounce in 2003 to US$409.17 per ounce last year.

The daunting psychological price ceiling of US$400 per ounce was smashed, and then turned into a major support level for the next stage of the gold bull market we’re in now.

So far, so good, for the gold price. But, as producers are acutely aware, cash and total costs have also been on the upswing around most of the world’s gold operations, putting the squeeze on many a miner’s margins.

GFMS’s Gold Survey 2005 presents a global view of the problem: weighted average cash costs for gold miners around the world increased last year by US$29, or 13%, to US$253 per ounce, while total costs rose US$36 to US$313 per ounce.

The most significant cost rises occurred in South Africa, Australia and the U.S., but Canada, happily, was one of the few to actually see cash costs decline, by US$11 per ounce.

(Also on the plus side in 2004, and signalling the general good health of the industry, almost 95% of cumulative global gold production was generated at cash costs below the average spot price.)

The source of gold miners’ higher cash and total costs is a complex brew of fluctuating currencies, head-grades, wages, and prices for oil, steel, energy and other basic consumables.

South Africa, long the number one gold-producing nation, was hardest hit last year, with cash costs rising US$66 to US$361 per ounce and total costs soaring US$80 to a painful US$395 per ounce.

The reason here is two-fold: the continued, dramatic rise in the rand, which took all but the savviest investors by surprise and caused the bulk of operating costs to rise; and the dismal, decades-long trend in the local industry of mining less gold at lower grades at ever-deeper levels.

Adding to the misery were significantly higher costs for wages, energy, water, rail and steel that were over and above any rises attributable solely to the stronger rand.

The next highest-cost, major gold producer was Australia. Cash costs there rose US$29 in 2004 to US$254 per ounce, while total costs shot up US$37 to US$326 per oz.

Australian operators were also hit by a strong local currency, which jumped 12% year-over-year compared with the greenback, effectively offsetting the gold price rise in U.S. dollars.

Some of Australia’s cost rise is attributable to mining issues at three of the country’s larger gold mines: Pajingo, Granny Smith and St. Ives. Lower costs, though, were reported at Yandal, Henty, Ridgeway and Cadia Hill, among others.

While it has been axiomatic among many gold investors that the best place to benefit from a weaker greenback is gold production from U.S. soil, the data here are not so encouraging: cash costs in the U.S. last year rose US$33 to US$249 per ounce and total costs jumped US$29 to US$314 per ounce. (Indeed, Goldcorp’s near-depleted Wharf mine in the Dakotas was the only gold mine in the U.S. to report lower costs in 2004.)

Most of the higher costs in the U.S. were primarily due to the mining of lower-grade ore and increased expenses for labour, power, diesel and mine maintenance.

Among the world’s major gold-producing nations last year, Canada’s exceptional position of having falling cash costs (US$197 per ounce) and total costs (US$274 per ounce) does play into our national delusion that good things happen to us because we’re nicer and smarter than everyone else.

However, the truth is more prosaic: Canadian gold mines are far more polymetallic and have benefited tremendously from soaring prices for various by-product credits, such as copper, zinc, lead and silver — Barrick Gold’s Eskay Creek mine in B.C. and Agnico-Eagle Mines’ LaRonde mine in Quebec being two noteworthy examples.

This trend even makes Northgate Minerals’ development of the extremely low-grade Kemess copper-gold mine in B.C. look like a brilliant idea: with copper prices exploding 50% higher in 2004, the mine’s cash costs plummeted from C$245 to just C$108 per ounce gold, after by-product credits. Peggy Witte, er, Margaret Kent must feel a little vindication!