Rick Mills: Investors seeking leverage to precious metals should focus on junior resource companies who own the world’s undeveloped gold and silver deposits as they provide the best exposure to a rising precious metals price environment.
You need to find the quality management teams withmoney in the treasury, the ability to raise more and owning the advanced projects that are well along the development path towards a mine. A mine that is going to be a long life, lowest quartile all-in cost producer in a geo-politically safe country. These companies are the world’s future gold/silver producers and of course many will be in the sights of mid-tier and major producers for takeover candidates as reserve replacement targets.
The gold mining industry needs to discover 90 million ounces of gold every year just to stay even.
But despite increased exploration expenditures, a record US$8b in 2011, and an increasinggold price, gold ounce discovery is not keeping up to the rate needed to replace mined ounces.
The Metals Economic Group estimates that the 99 significant discoveries (defined as greater than 2 mil oz) found between 1997 and 2011 replaced only 56 percent of the gold mined during that same period.
According to the Thomson Reuters GFMS’s Gold Survey 2012 global gold mine production was flat (output rose 0.1 percent to 1,366 metric tons) in the first half of 2012.
The average grade of ore processed globally dropped 23 percent from 2005 through the end of last year and is forecast to decline another four percent in 2012.
The GFMS report also said the average cash cost across the gold mining industry for mining an ounce of gold is a record $727 per ounce. The average cash margin dropped to $872 an ounce in the second quarter from as much as $1,032 an ounce in last year’s third quarter
Average operating/cash cost figures include only those costs directly associated with the production of the gold such as;
- Cost of energy
- Raw materials such as steel, explosives etc
A complete breakdown of costs, an all-in cost figure, courtesy of CIBC, shows cash operating costs pegged at $700 an ounce.
Sustaining capital, construction capital, discovery costs and overhead at $600. Add in $200 for taxes and you get US$1500.00 as the replacement cost for an ounce of gold.
Using the all-in figure provides a more accurate and definitive picture of actual mining cost and profit.
Also, according to CIBC World Markets, the sustainable number gold miners need is $1,700/oz. The long term gold price chart from the World Gold Council shows gold has been in consolidation since late 2011.
Capital inputs account for about half the total costs in mining production – the average for the economy as a whole is 21 per cent. Obviously many of the costs, once incurred, cannot be recovered by sale or transfer of the fixed assets.
Mining is an extremely capital intensive business for two reasons. Firstly mining has a large, up front layout of construction capital called Capex – the costs associated with the development and construction of open-pit and underground mines. There are often other company built infrastructure assets like roads, railways, bridges, power generating stations and seaports to facilitate extraction and shipping of ore and concentrate.