(Kitco News) - According to Metals Focus, the global average all-in sustaining costs (AISC) of gold operations reached an all-time high of $1,289/oz in Q2 2022, an 18% y/y rise for the second consecutive quarter.
The consultancy said that these increases are "unprecedented", exceeding the cost inflation experienced during the start of the pandemic when lockdowns and logistical constraints initiated the current rise in production cost.
Meals Focus noted that the modest 3% y/y average gold price increase in Q2 2022 did little to dampen the loss of profitability as AISC margins fell 20% y/y.
"Critically, the 10% fall in the gold price since the end of the quarter, in addition to ongoing cost inflation, looks set to produce a margin squeeze in Q3 2022 unparalleled in recent years," the authors of the report said. "Unsurprisingly, gold miners' equity valuations have suffered. The HUI, an index tracking major gold miner share prices, has fallen 21% to-date in Q3, a retracement not seen since the start of the last major gold producer bear market in 2013."
According to the report, the 25% y/y increase in cash operating costs is the major component driving the increase in the AISC. Cash operating costs are site-based costs capturing mining, milling and on-site administration costs.
Metals Focus pointed out that two most significant inflationary pressures in Q2 2022 were rising fuel and energy costs, as well as higher prices of consumables and materials.
The consultancy said that consumables & materials input costs represent around 30% of operating expenditure and are under considerable pressure, adding that supply chain constraints, the Russian-Ukraine conflict and the energy price shock are some drivers behind the cost increases.
"The price of major consumables such as explosives, cyanide, chemicals and reagents vary across regions. Some producers have reported increases of up to 100% for some of these items whereas a more typical inflation rate is between 20-30%," it said.
Fuel and energy inputs typically represent around 15% of operating cost. The 65% y/y oil price increase in Q2 2022 (basis the period average) had significant implications for diesel and electricity costs for miners, Metals Focus noted.
|
| Artemis Gold commences earthworks at its Blackwater plant site |
In terms of labor, which is the largest component of operating costs, the current shortages of workers in North America and Australia are applying inflationary pressure to local costs, but the current dollar strength is moderating the impact, the report found.
Importantly, the consultancy pointed out that all regions experienced significant increases in AISC, which is a "testament to the global nature of cost inflation."
Looking to Q3 2022, Metals Focus said that under an indicative scenario with a 10% increase in Q3 AISC, average gold production margins will decline 50% y/y, which is a "drop not experienced since the last bear market of 2013."
"AISC margins fell 60% over the course of 2013 and the HUI in step declined 54%. With the potential of 2022 AISC margins to experience a similar magnitude of decline, the current year to date 30% fall in the HUI could indicate that further pressure of producers' equity valuations is possible," Metals Focus concluded.
