Rising costs continue to hamper gold producers

As detailed in SNL Metals & Mining's recently released "Strategies for Gold Reserves Replacement," the cost of building a mine increased significantly over the last 10 years, from $560 per ounce of gold production capacity in 2004 to more than US$2,300/oz in 2013. Based on data from mines under construction, capital costs are expected to peak in 2014 at almost US$2,400/oz.

This analysis used a three-year running average of capital costs per ounce of production capacity for 192 primary gold mines with capacity of at least 50,000 ounces per year that entered production from 2004 to 2013, as well as 22 mines under construction and slated to begin production in 2014 or 2015. Mine redevelopments and expansions were not included since these projects' existing infrastructure makes them incomparable with new mine developments.

The three-year running-average capital cost of capacity follows behind the trend set by the gold price. When gold prices increased sharply in 2006, producers responded by approving construction of more capital-intensive projects. The lag between the change in gold prices and the increased capital cost intensity is simply the time required for construction of more capital-intensive projects, which began at earlier gold prices. While producers and prospective producers greatly curtailed capital spending in 2013 and to date in 2014, capital cost intensity is expected to increase to almost US$2,400/oz in 2014, before pulling back to about US$1,900/oz in 2015.

The cost of operating a mine after it is built also increased over the last 10 years. Weighted-average annual cash costs increased about 190% from less than US$250/oz in 2004 to a peak of US$708/oz in 2012, before pulling back slightly to US$702/oz in 2013. Fortunately for producers, annual average gold price increases mostly outpaced cash cost increases during the period, soaring 308% from US$409/oz in 2004 to a peak of US$1,669/oz in 2012. The only exception was a 15% drop in gold prices in 2013, which surpassed a 1% decrease in weighted-average cash costs for the year. Based on cash costs alone, it would seem that producers' margins should be quite healthy; however, our analysis indicates that the total costs of production (comprising reserves replacement, capital spending, operating costs and administration) kept closer pace with gold prices over the 10-year period.