Alan Kohler's been talking about gold again.. more importantly cost of production vs their hedged gold price. The graph below from the Eureka Report (courtesy of ANZ data) shows how 90% of gold mines' cost of production is circa $1300/oz. Since the price fell, the area under the graph (margin) is now quite small http://www.eurekareport.com.au/graphs/list
This is not my understanding of the '90th percentile cost' - I think it most likely means that 90% of gold miners' costs of production are less than $1300. It does imply that some are being squeezed, but I'm guessing the average miner (whose costs should be closer to the 50th percentile cost) is still fine. Can anyone clarify?
you are correct so if spot went below 1300 10% of miners will feel it, but how large are these mines?
Exactly. Depends on whether the percentile was calculated by weighting according to production, or weighting according to 'number of miners' - the former seems far more useful, and would mean that about 10% of production would be affected if spot dropped below $1300. The original presentation of the graph from ANZ should contain info on how the percentile was calculated. Can anyone be bothered digging it up?
Also worth to keep in mind that when the price went up mine managers deliberately started targetting parts of their reserves that had higher production cost (e.g. went to their tailings or went to the next zone with, say, only 1.2g/tonne rather than, say another panel with 1.8g/tonne). Taking a random company as an example (OceanaGold), you can see the average cash operating costs went from $400/oz in 2009 to around a $1,000/oz by 2012. The annual gold production was roughly constant over the same time period. There are obviously a range of factors (including exchange rates, fuel prices etc), but deliberately targetting the lower grade ores (or ores with a higher pre-strip) was a significant component. Ironically, what the higher prices may have actually done in the first instance is not brought forward total production, but brought forward higher cost production. After a period of time the annual output capacity may be increased but now with a blend of "cheap" and "expensive" ore feedstock.
Also worth to keep in mind that when the price went up mine managers deliberately started targetting parts of their reserves that had higher production cost Howdo you know this I thought miners were trying to get the most from the spot price increase and they mined high prduction zone and investedin exploration of new ones
They say it in their quarterly reports. It's not just gold but pretty much across all commodities particularly where there is a choke point on total output after the digging bit (e.g. it is more difficult for bulk commodities to alter their near term mining plans). Uranium producers like Ranger were doing the same thing back in 2008 and ditto Cannington. As I said there are a range of other factors which make every mine's reaction unique, but maintaining the average profit margin by targetting lower grade reserves in the near term seems to be fairly common, particularly the desire to reprocess tailings. Typically new CAPEX is stimulated by the prices but takes a couple of years to flow through. Edit: You could think of it as taking advantage of a near term opportunity to increase the total whole-of-life production (but not the quarterly production) from a given resource in the face of volatile prices. And there's a limit to how much a given mine can do this, which means it's always a short term phenomenon.
So at the moment the message I'm taking from this thread is that gold has room to fall much further before cost of production starts restricting supply - basically the opposite of what's implied by Alan Kohler in the Eureka Report.
Because there are so many above ground stocks (which is a good thing if you want it to be money) the mining cost of production affects new additions to the total stock (and they can absorb a few hundred dollars more change before changing substantially). The secondary market churn will always be more important than the mining cost IMHO. The secondary market can drive prices down to $400 or up to $10,000 whereas the mining cost can essentially only influence it around the edges. The story for silver is totally different however, because of the much lower level of above ground stocks.
Don't go taking all the credit, this is Alan's interpretation: "Drastically narrowed" makes the message he's trying to put across pretty clear.
