If a gold mine was a hockey workforce, the forwards can be manufacturing, piling up ounces like objectives on a scoreboard. The prices per ounce are like defencemen: strong, predictable, hardworking however not often getting the glory. Whereas manufacturing numbers often drive the share costs of mining corporations, it’s value management that retains the corporate within the recreation with constructive earnings.
Neglect to regulate your prices, and the entire enterprise can shortly go into the pink. Manufacturing numbers from gold mines are meaningless if prices aren’t given. Buyers want to know a number of the elements that go into gold mining prices
Whereas retail buyers are sometimes impressed by high-grade mines that crank out the ounces, they need to understand that gold-mining is like some other enterprise: revenues should exceed prices.
Mining prices rose steadily via the 2000s which ought to have harm plenty of gold miners. However it didn’t. In 2001 when the gold worth was simply $272/oz, gold mining corporations had money prices of $176 an oz, giving a 54% margin. Nevertheless, by 2006 the gold worth climbed into the $600 an oz vary and miners have been dropping cash. Quick ahead to 2012, when the typical money value was $719/oz – 184% greater than 2006.
Working with the World Gold Council, senior gold corporations got here up with a brand new commonplace to measure prices: all-in sustaining prices (AISC). AISC consists of not solely the direct prices to mine gold (equipment, processing, energy, labor, and so forth.), however G&A bills, exploration, reclamation and sustaining capital. It doesn’t embrace challenge capital, dividends, taxes and curiosity funds.
Even so, AISC significantly tightened gold corporations’ margins. Of the seven giant gold companies, the typical AISC in 2012 was $1,zero46 an oz, however the gold worth was sitting at a really wholesome $1,675 initially of 2013 – yielding a mean margin of 60%. Nevertheless, 2013 was additionally the yr the gold worth slid to $1,233 – a drop of over $400. At this level gold miners entered a interval of ache; many bought belongings, reduce employees and took billion-dollar write-offs on properties as their inventory costs plummeted.
The purpose is, prices matter. They usually’ve continued to go up. In accordance with New York-based CPM Group, margins have squeezed as all-in sustaining prices have grown 22% because the gold worth bottomed in 2016.
Manufacturing numbers from gold mines are meaningless if prices aren’t given. Buyers want to know a number of the elements that go into gold mining prices, so they’re able to ask the best questions and break down these prices, in an effort to dive deeper into the entire AISC that’s often given. These embrace: depth of deposit; strip ratio; open pit vs underground; labor; infrastructure; and restoration technique.
Open pit vs underground
Of utmost significance to the price of extracting gold is the place the gold lies inside a deposit. A deposit of disseminated gold (small particles of gold distributed all through the rock) near floor might be open-pit mined, whereas gold present in often-thin veins a whole lot of meters under floor is mined utilizing underground strategies. There are lots of extra low-grade gold deposits than high-grade. For each 2.5 grams per tonne (g/t) gold deposit, Mom Nature varieties one other 10 deposits round 1 g/t. Usually talking, one gram per tonne works for open-pit mines, however underground gold mines require at the least 2.5 g/t to be financial.
Open-pit mining is both completed with a fleet of haul vans (some now automated) or an in-pit crushing and conveying system (IPCC). Underground mines are accessed by way of a shaft or ramp. Miners extract the ore by means of numerous strategies utilizing specialised gear that function in slender, darkish tunnels. Two of the deepest (and hottest) mines on the earth are in South Africa: East Rand and TauTona.
Depth of deposit
Probably the most well-known of the world’s shallow deposits is the Carlin Development in Nevada. Right here microscopic gold is present in virtually each rock. The gold is low-grade (beneath one gram per tonne) however plentiful. Between 1835 and 2008 a whopping 152 million ounces was pulled from the Carlin Development and different gold developments in Nevada, together with Cortez and Walker Lane, principally by way of open-pit mining. Some Nevada pits at the moment are depleted and have moved underground. The strategy of heap leaching – whereby mining corporations pile ore onto giant piles and irrigate them with leachate – originated in Nevada the place close to floor ore is oxidized. The leachate percolates by means of the ore, thereby dissolving the gold. Whereas heap leaching for metals has been recognized about for lots of of years, it wasn’t till 1969 that the primary gold and silver heap leap operation started at Cortez in Nevada. Barrick Nevada’s Cortez property continues to be going, with ore drawn from the Pipeline complicated open pit, and Cortez Hills, a mixture underground/ open pit mine.
Heap leaching know-how was a serious breakthrough as a result of it considerably lowered gold restoration prices (versus conventional cyanide leaching – see part under on gold restoration prices) for low-grade however high-tonnage “Carlin deposits” corresponding to these present in Nevada. An instance of a low-cost, high-margin Nevada producer is the Marigold Mine. Owned by SSR Mining (TSX:SSRM), Marigold stands out for its extremely low grades of .46 g/t. In manufacturing since 1989, Marigold is a big run-of-mine operation. After blasting the ore, it doesn’t must be crushed or floor and may go instantly onto the leach pad which considerably reduces prices. Within the third quarter Marigold reported an AISC of $965/oz, after realizing a gold worth of $1,207/oz.
The strip ratio is the quantity of waste rock, or overburden, that have to be eliminated as a way to get to the mineralized rock (ore). The strip ratio is calculated by dividing the thickness of the overburden by ore thickness. Eg. if the overburden is 100m thick and the ore is 50m, the strip ratio is 2:1. The decrease a strip ratio, the extra worthwhile the mine might be, since much less materials must be moved.
Excessive-grade gold contained in slender veins that snake via the rock can solely be mined by excavating shafts and hoisting the ore to floor by way of low tunnels (drifts). This course of is dear, as a result of digging deep requires a whole lot of materials to be eliminated across the veins in order that the mining gear can entry them. Think about a typical quartz vein that’s zero.5 meters large. At minimal one other meter have to be added to the vein to mine it. The width is now 1.5m. However logistically, so as to drill, blast, and muck the ore, the vein width have to be stretched to 3m. This implies the deposit, first estimated at 10 g/t, is now solely 5 g/t as a result of the gold has been “diluted” by the waste rock. Dilution can drastically have an effect on the economics of mining the deposit. Rock that was initially estimated at $420 a tonne is now value $210/t – slicing the interior price of return (IRR) and the web current worth (NPV) in half.
Underground mining is very delicate to gold costs, contemplating the excessive operational prices.
A great instance is Nova Scotia, the place an extended historical past of small-scale high-grade underground mines by no means turned a revenue. Nobody thought it was potential, however Atlantic Gold (TSX-V:AGB) has proven that open-pittable, disseminated gold shouldn’t be solely potential however a extremely worthwhile enterprise in Atlantic Canada. Its flagship Moose River Consolidated (MRC) venture – the primary open-pit gold mine in Nova Scotia – opened simply over a yr in the past.
The mine plan entails a really low strip ratio (zero.76:1), which suggests each there’s little or no waste ore to assist maintain prices low and gold manufacturing excessive. At full build-out AGB expects to supply about 200,000 ounces a yr.
At AISC of $528 an oz at right now’s gold worth of $1,250/oz, Atlantic Gold’s revenue margin is a exceptional $717/oz. In contrast to the gold majors on the prime of the mining cycle, whose mantra was “extra manufacturing”, AGB is operating the MRC mine like a enterprise – holding prices consistent with revenues. Moose River generated income of $6 million within the third quarter.
Together with a low strip ratio, the opposite elements serving to Atlantic Gold management prices are: the mine’s shut proximity to labor, suppliers and the airport; a 1.5 g/t grade; and ease of gold restoration. Actually, Atlantic Gold is at present the bottom value gold producer. The very best-cost mid-tiers have AISCs of between $1,200 and $1,300/oz.
The corporate is usually singled out as a benchmark for under-valued corporations, contemplating it has one of many highest market values and EV/gold useful resource ratios amongst its junior producer friends.
Infrastructure: There are lots of of gold deposits all over the world that may by no means be developed as a result of they lack entry to infrastructure – energy, water and roads – making them too costly. Each exploration corporations and buyers ought to acknowledge this at an early stage as a attainable deadly flaw. Mines situated near inhabitants facilities don’t have to fly staff out and in, their provide strains are brief, they usually can faucet into an present electrical energy grid moderately than paying for a brand new energy line and servicing it. In line with a research by Mining Intelligence, electrical energy might be three to 4 occasions costlier at a distant mine; diesel gasoline, explosives and lubricants are as much as 60% greater. Camp amenities, gasoline storage, helicopter staging space, and so forth. can improve the labor pressure by as much as 25%. Gold buyers also needs to contemplate the nation the place the mine is situated. Some are extra pricey than others. Mining Intelligence ranked them in line with jurisdiction.
Labor: Labor represents the most important element of a mining operation, 53% in response to SRK Consultants. In Canada the mining business has the very best wages and salaries of all industrial sectors, with the typical annual pay exceeding $110,000. The business is experiencing a tighter labor market, as school and college graduates enter different fields. Barrick reportedly paid $304 an oz for labor in 2015 in comparison with $192/ouncesin 2010. In fact, labor prices are cheaper in some nations, and when mixed with a weak foreign money, this could considerably widen an organization’s margins. In distinction, rising foreign money values versus the US greenback squeeze margins.
Gold restoration prices: Extracting gold from ore could be difficult and numerous mines have failed as a result of they didn’t recuperate sufficient gold to stability enter prices. Probably the most generally used course of to extract gold is cyanide leaching, based mostly on a chemical response first recognized in 1894 by L. Elsner. A slurry of floor ore is combined with cyanide within the presence of activated carbon. The carbon adheres to the gold, which is then stripped out at excessive temperature and strain to type an electrolyte answer. Gold bullion is recovered from the electrolyte by electrowinning.
As I discussed above, low-grade gold mines have taken benefit of low value heap leaching if the ore is oxidized and amenable to this remedy. It’s typically cited that international reserve grades have quickly decreased so any know-how which lowers the price of gold restoration is essential to business’s survival. Elements that go into heap leaching’s decrease capital and operational expenditures embrace: easy design and gear, speedy payback, decrease power and water necessities, and fewer environmental considerations together with no tailings disposal.
Refractory ore is harder and costly to course of because of the presence of sulfide minerals, which block the cyanide answer.
Even with a big mineral deposit, the metallurgy might be difficult if the ore is refractory. For instance Chesapeake Minerals’ Metates venture in Mexico is taken into account one of many largest gold-silver-zinc reserves on the planet, at 18.5 million ounces of confirmed and possible gold. However the ore is double refractory, which means the gold is locked inside the pyrite and incorporates a number of carbon. Breaking the gold free requires each bodily (ultra-fine grinding, autoclaves) and chemical processes which are energy-intensive and dear.
In distinction, the only most cheap technique is gravity restoration. Underpinned by the precept that gold contained inside an orebody is greater in particular gravity than the
host rocks, gravity focus units create motion between the gold and host rock particles in a means that separates the heavy from the sunshine materials. Going again to the identical real-world instance, 60% of Atlantic Gold’s ore is gravity-recovered earlier than cyanide leaching.
Gold mines with the six elements simply outlined are doubtless producing gold at a decrease per-ounce value than their rivals – bulking up their margins particularly if the gold worth rises and their prices don’t.
The lesson for buyers is obvious: don’t make the error of judging a mine purely by its manufacturing numbers and grades. Of larger significance are a wholesome money move and low value construction, which permits an organization with capital self-discipline to reap the rewards of a excessive gold worth when occasions are good, however shield its margins when the worth takes successful.
Concerning the writer: Jack Graham has greater than 20 years of expertise as a author and editor specializing in Canadian small and micro-cap shares excessive gold worth when occasions are good, and shield its margins when the worth takes successful.