Gold Mining Industry Needs $1650 Gold to Cover Costs

Increased costs mean a floor has developed...

IF THE Gold Mining industry is to keep its nose above water and maintain the current production base, Gold Prices need to stay above $1,650 an ounce, writes MineWeb's Geoff Candy.

Speaking from the sidelines of the 2012 African Mining Indaba conference, AngloGold Ashanti CEO, Mark Cutifani, said, at a price of $1,650 per ounce, gold miners are "only just returning the weighted average cost of capital for the industry".

This is the number that gold miners need to work from on a real basis he says, but added, "The average cost to produce an ounce of gold, all up, everything loaded in, is about $1,200 to $1,250.

Harmony Gold CEO, Graham Briggs, agrees with Cutifani saying, from Harmony's perspective, the all-in cost to pull an ounce of gold out of the ground is around $1,250. This figure includes everything from the cost of the Harmony head office to maintenance and its exploration program which is why it is higher than the $958/oz cash operating cost figure reported by the miner at its half year results on Monday.

Briggs added, "Of course there are other costs as well that would need to be added in over and above these so Mark [Cutifani] is probably fairly spot on with his calculations."

Similar figures cropped up in a conversation with IAMGold CEO, Steve Letwin, who told Mineweb, that a floor has developed in and around the $1,400 - $1,450 level as a result of increased costs across the industry.

"I think you hit peak gold three or four years ago. You cannot find the large deposits any more. Most of it being lower grade and in more remote locations, so it's going to be difficult for anybody to produce gold at less than $1,200/oz in terms of new discoveries," he said.

Randgold CEO, Mark Bristow, agreed with these sentiments and explained that a large part of the problem for the industry as a whole is that, while input costs have risen, much of the increase in costs experienced by miners is the result of a deteriorating asset base than "inherent inflation in the input costs".

Bristow adds, if one looks at the industry as a whole, "if you look at the reserve grade and then the mining grade, the actual processing grade - the processing grades in most companies are above the reserve grade. Because what's happened is the industry has been reducing its grade to add more reserves at higher Gold Prices, but in order to keep its production up, it has to keep the grade up otherwise it's got to invest in new capacity."

The problem he says, is that while more capacity is needed if grades are lower, "The industry is ex-growth and ex-capacity."

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