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CPM Group: Mining Costs For Gold Producers Keep Rising

By Kitco News
Tuesday March 26, 2013 9:00 AM

(Kitco News) - The average cost of gold production continued to rise in 2012, although it remained well below the price, allowing some companies to operate lower-grade mines, CPM Group said Tuesday.

However, the New York consultancy also said, rising costs mean “marginal” mine supply could be hurt if the price of gold itself were to move sideways in the medium term. Overall, margins may be squeezed if companies do not cut costs.

The “production-weighted cash cost” of gold climbed for the 10th straight year in 2011, hitting $627.96 an ounce, an increase of 15.8% over 2010, said CPM Group in its Gold Yearbook 2013. This further increased to $718.37 as of the third quarter of 2012. (The consultancy explained that the data to determine these figures accounts for roughly 60% of total global mine production).

“Despite these sharp increases in gold mining cash costs, the margin, on a nominal basis between the average cash operating cost and annual average price of gold, has risen from $114.58 per ounce in 2002 to $940.63 per ounce in 2011,” CPM Group said. “Based on the average cash cost and gold price for the first three quarters of 2012, the margin between these two metrics was $941.95 per ounces.”

Costs have remained low relative to the price due to processing techniques such as leaching and a majority of the mining done from open pits, which is less expensive than underground mines, CPM Group said.  “The rising price of gold has encouraged miners to mine lower grade properties and ore zones,” CPM Group said.

The largest portion of the cash cost is labor, typically accounting for 45% to 55%.

“This component of cash costs has been on the rise and is one of the primary reasons for the increase that has been occurring in gold-mining cash costs,” CPM Group said. “The increase in labor costs can be partially attributed to a shortage of skilled workers in the entire mining industry and partially to the high price of gold, which results in all workers demanding a higher wage or salary.”

As of the third quarter of last year, 90% of global mining was done at cash costs below $1,107, CPM Group said. This was an increase from the comparable period in 2011, when 90% was done below $1,033.

“Marginal mine supply is likely to get negatively affected if the price of gold moves sideways, as we expect in the medium term, and the cash costs continue to rise,” CPM Group said. “In the case of gold, mine supply is more influenced by the price of gold than the other way round.”

Meanwhile, CPM Group said the “total operating costs” of mining gold – which adds in overhead, financial and administrative costs – rose to $922.67 an ounce in the third quarter of 2012. This was up from $756.60 in 2011, which in turn was up from $676.63 in 2010.

“The increase in these costs reduces the margin available to producers,” CPM Group said. “Based on the average total cost and gold price for the first three quarters of 2012, the margin between these two metrics was $766.70 per ounce. This compares with a margin of $804.19 during the same period in 2011.

“These margins are likely to continue being squeezed unless mining companies do something to control costs. The expectation that gold prices will move sideways over the next few years will make it more challenging for mining companies that have over the past decade seen an increase in costs accompanied by an increase in gold prices.”


By Allen Sykora of Kitco News; asykora@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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