What Does It Cost to Produce an Ounce of Gold?

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". . .if costs are calculated on an all-in basis, the cost curve for the major gold mines around the world would be, on average, $184/oz higher."

There are several ways for gold mining companies to measure operating margins, with the 'total cash cost' generally accepted as a standard metric.

However, analysts at RBC Capital Markets have taken things a step further, and compared bullion producers on the basis of the "all in" cost per ounce, which includes general and administrative costs (G&A) and exploration expenses, as well as the sustaining capital needed each year for the upkeep of plant and equipment and existing mine development.

The analysts estimate that, on average, tier-one gold producers will have all-in costs of $582/oz in 2009, while tier-two companies will be slightly worse off, at $634/oz.

"Further, if costs are calculated on an all-in basis, the cost curve for the major gold mines around the world would be, on average, $184/oz higher," RBC said in a research note this week.

As would be expected, the large tier-one gold producers benefit from economies of scale for G&A and exploration, given their higher production volumes and ability to use purchasing power to reduce the cost of consumables, the analysts comment.

However, the sustaining capital is lower for the tier two companies given, in general, their newer and smaller-scale operations.

But, as many of the tier-two gold producers have significant production growth profiles, these costs will likely not decline on a per-ounce basis in the near term.

Tier-two firms should also have more free cash flow available in the near term for debt repayment and reinvesting, as new projects come onstream. But, in many cases, the majority of capital for new mine construction has already been spent.

"This suggests the potential for M&A activity as the Tier II Golds look to add new projects to fill their production pipeline," RBC said.

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