GFMS: Mines Face High Long-Term Sustainable Costs

Source:

“. . .miners will need to be prudent housekeepers in the medium term”

GFMS' Gold Survey this year shows that China was again the world's largest mine producer of gold in 2009, with output of 324 tons, an increase of 11% over 2008. South Africa (SA), long the giant of the industry, ranked third behind Australia; while Australian output increased marginally to 223 tons, SA output fell again to 220t after 234t the previous year. The majority of the other major producers also registered increases, with the notable exception of the U.S., which saw a fall from 234t to 219t.

Overall world mine production increased by 163 tons to a total of 2,572 tons, thus reversing three previous years of production declines.

The increases in China have been driven by a number of factors, notably rapid commissioning of small-scale (and low-grade, high-cost) operations in response to high prices and low labor costs. Official support of the sector, especially as a knock-on from the base metals sector, has been instrumental in raising output as has continued market consolidation through merger and acquisition. In stark contrast to the discrete nature of the industry only a few years ago, GFMS reports that official statistics now ascribe almost 40% of domestic gold output to the country's five largest producers. The industry is becoming more geographically diverse, and while the eastern provinces continued to dominate gold production, more than one western province is making rapid headway.

Global cash costs of production are estimated at $478/oz. for 2009, a 3% increase on the previous year.

All-in costs are estimated at more than $700/oz., while GFMS believes that the "true," fully loaded sustainable long-term cost of production (not allowing for return to shareholders) was substantially higher than this.

As well as a global average all-in cost breakdown chart, the survey contains a fascinating chart that strips out the different variables in a cost model and quantifies them for the differential between 2008 and 2009.

Gold prices may be pleasantly high at above $1,100 for now, but the longer term picture may suggest that miners will need to be prudent housekeepers in the medium term.

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