Although gold has been used as jewelry and currency for thousands of years, it also has many other uses. For instance, many electronics and medical appliances use gold for its excellent and durable conductive properties. Investors and banks also hold onto gold as a loose form of commercial insurance against dramatic economic events. Individuals, businesses, and governments continue to clamor for more gold. Gold reserves are finite, and pulling new gold out of the ground can be very expensive. In fact, it is common to hear industry insiders cite $1,200 as the all-in cost for mining a single ounce of gold.
Cost Reporting Debate—Does It Really Cost $1,200 to Mine One Ounce?
The $1,200 price tag is still questioned by investors and industry insiders. Most of the controversy boils down to how gold mining companies report on their financial statements.
In the 1990s, mining companies picked up the habit of reporting cash costs on their financial statements. This is a non-GAAP and non-IFRS measure that combines the costs of mining gold and the costs of complying, bringing gold to market, and selling it.
However, cash costs ignore the expenses associated with sustaining capital equipment, as well as general and administrative expenses.
To more accurately relay the true expenses of production, the World Gold Council developed a new measure: “all-in sustaining costs.” This measure does not leave out as many associated costs, but it can be easy for a company to exaggerate or play accounting tricks to make its margins appear smaller or larger than they actually are.
The real cost of production remains uncertain. However, gold investors should appreciate just how difficult it can be to find, mine, and bring gold to market.
Gold Production Costs Vary from Region to Region
The practical, regulatory, and security costs associated with gold production can vary dramatically from region to region. The most expensive place in the world to mine gold is in South Africa. There, all-in gold production costs can be more than twice as much as in Peru, which is the least expensive place to mine gold. According to the Thomson Reuters GFMS Gold Mine Economics Service, average all-in costs for South Africa were over $1,400 between 2005 and 2013. Compare that to less than $700 in Peru, approximately $850 in the United States, $1,100 in China, and $1,200 in Australia.
South African gold mines are relatively insecure, mainly because South Africa remains a relatively dangerous place to conduct business. Companies there may have to hire additional security because the region lacks the property rights protection, police presence, and just legal systems of more developed regions.
The 8 Stages of the Gold Mining Cycle
Gold mining is uncertain, expensive, competitive, and highly intensive.
In 2014, the Minerals Council of Australia broke down the typical mining cycle into eight stages. The most expensive stages are 4, 5, and 6.
- Generative Stage
The process of discovering mineable gold deposits. “Generative” refers to the application of geoscientific tools to identify general areas for potential gold exploration.
- Primary Exploration Stage
This is where exploratory drilling and extensive geochemical analysis take place. Once a potential spot is identified, gold companies often need to halt the process until the local authority grants an exploration license (along with other approvals and/or studies).
- Evaluation Stage
The mining company, having estimated the size and location of the gold reserve, must conduct socio-economic analyses and undergo various other environmental processes.
- Mine Construction
The stage where a gold mining company prepares the new site for construction. New buildings, roads, and mining apparatus need building. Sometimes, old buildings or structures need clearing out before construction begins. This process can last for years.
- Production Stage
When the company physically extracts new gold ore from its site.
Rehabilitation rules vary from location to location, but nearly all modern gold excavation sites must be restored to pre-exploration conditions or at least as close as possible, within reason. Rehabilitating a gold mine can be very expensive.
- Monitoring and Evaluation
Mining company monitors vegetation growth, species diversity, and other ecological factors at the location. This process sometimes lasts several years.
- Lease Relinquishment
The last stage involves an assessment by the local authorities. If the government believes the company has done enough to return the site to a natural state, the company many relinquish its lease, tenure, and liability for the area.
Regulations Increase the Cost of Production
Many developed countries, including the United States and Australia, have seen increasing regulation and taxes on businesses in the 21st century. These also contribute to rising gold production costs.
As the Minerals Council of Australia warned in 2012,
“Long and complex approval processes, as well as other areas of unnecessary red and green tape, have acted to delay project development and added to project costs.”
Mining vs. Other Sources of Gold
Not all gold is sourced from the ground. According to the World Gold Council, more than one-third of the yellow metal comes from recycled products, such as old jewelry, dentistry, and electronics.
During large chunks of the 20th century, the world’s central banks were net suppliers of gold. After spending their early history accumulating gold to back up national currencies, central banks sold more gold than they purchased after the U.S. dollar became the de facto world reserve currency under the Bretton Woods Agreement.
In recent years, however, the trend has changed. Central banks have become net demanders of gold, which puts upward pressure on both production and retail costs.
Where Will Tomorrow’s Gold Be Produced?
According to the United States Geological Survey, the world’s largest share of minable gold reserves lie in Australia—more than 9,000 tonnes, or almost 20% of known global reserves. Other notable reserves exist in South Africa, Russia, Chile, Indonesia, the United States, and Brazil.
When it comes to harvesting gold, however, no country is more proactive than China. Despite having just the ninth-largest known gold reserves (a little more than 3% of the global supply), China produces 12-15% of all the world’s new gold each year.
Mining Costs Tend to Rise Over Time
Gold is a rare element, and much of the world’s supply of easily attainable gold was picked up, mined, and prospected long ago. Even though mining efforts are much more sophisticated than they used to be, finding new sources of gold—and cost-effectively mining them—grows more challenging each year.
Although the information in this commentary has been obtained from sources believed to be reliable, American Bullion does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice. American Bullion will not be liable for any errors or omissions in this information nor for the availability of this information. All content provided on this blog is for informational purposes only and should not be used to make buy or sell decisions for any type of precious metals.