A lot has already been said about Peak gold and miners having to resort to mining low-grade ore. The problem with low grade gold is that it does not promise high profit marginal. Think of mining companies who produce low grade gold, how do they make money? Think of gold mines as a hockey team, the forwards are the ones responsible for production, the defence are like costs: predictable, solid and hardworking. Production numbers drive share prices for mining companies but cost control is what ensures positive earnings and keep mining companies in the game. If you neglect your cost control the company could end up owing more than what it is making. Production numbers from mines are meaningless if the costs of running a mine aren’t controlled. Mining is no different from any other businesses: the cost of doing business should never exceed the revenue.
The cost of mining gold rose steadily through the 2000s, but it didn’t hurt gold miners as much as it should have this is because the price of gold was $272/oz. in 2001 whilst production costs were $176 per ounce of gold mine which mean miners had a 54% profit margin. Things changed in 2006 when the cash cost of mining shot up to $600/oz. and became even worse when in 2012 it rose 184% higher than it was in 2006 to $719/oz. Miners were losing money. The World Gold Council stepped in and together with the bigger mining companies developed a new standard of measuring mining costs call All-in Sustaining Costs (AISC). This includes the costs of direct mining (machinery, power, processing and labour) and G&A expenses, exploration and sustaining capital amongst other things. What the AISC does not include is the project capital taxes, dividends and interest payments.
This might have helped improve margins but the big take-away for miners was: Mining costs matters. The amount of gold that is being mined by a company does not mean much if the costs of doing so aren’t considered. Investors need to understand the factors that influence mining costs before diving into the AISC. These factors include, open pit vs underground, depth of deposit, recovery method, infrastructure and labour.
Open pit vs underground mining
To determine the cost of mining it is important to consider where the gold lies. Gold deposit that are concentrated on the surface call for open pit mining. Gold that is embedded in thin veins hundred of meters below ground call for mining using underground methods. There is more low-grade gold than high-grade to be mined. For every 2.5 grams per tonne (g/t) gold deposit there are around 10 deposits of 1g/t gold. Generally, 1 g/t only works for open pit mining, underground mining requires at least 2.5 g/t to be economically viable.
Depth of deposit
There are deep and shallow deposits of gold all over the world, the shallowest deposits were found in the Carlin Trend Mine in Nevada where every rock has microscopic gold deposits. The gold is under 1 g/t which makes it very low grade but there is plenty of it. There has been 152 million of this low grade gild pulled out between 1835 and 2008. The gold is extracted mostly through open-pit mining. These mining operations wherein ore is piled up uses a process of heap leaching. The ore is irrigated with a leachate which percolates through the ore. It dissolves the gold and makes separating it from the rest of the ore easier. Heap leaching technology has significantly reduced the costs of gold recovery for mines that produce low-grade gold from high-tonnage of ore.
The amount of waste rock that remains when the gold has been leached from the ore is called strip ratio. It is calculated by dividing the overburden thickness by the thickness of the ore. So if you have an overburden that is 100m thick and gold ore that is 50m, the strip ration will then be 2:1. The higher the strip ratio, the less profitable the mine can be and vice versa.
High-grade gold found in underground veins can only be reached by excavating shafts and then lifting that ore to the surface. This requires a lot of sophisticated equipment and labour. For instance, if you have a 0.5 m wide quartz vein you would have to stretch the vein width to at least 3 m. This means the first estimate will be reduced as a fraction of the gold will get diluted by the waste rock. This dilution can affect the economics of gold mining. Gold containing rock with an original estimate of $420 a tonne drops down to about half that price undercutting the internal rate of return in half. Research and experience by a miner like Atlantic Gold in Canada has shown that open-pit mining can be highly lucrative even with a low strip ratio of 0.76:1. If we take the AISC of $528 an ounce at today’s gold price of $1,250 per ounce, we can see Atlantic Gold’s profit margin go up to an impressive $717/oz. Besides the low strip ratio, Atlantic Gold is able to control it’s costs because of it’s closeness to labour and supplies and an airport (if it should ever need quick transportation. This makes Atlantic Gold an undervalued company with the highest market value.
The world has hundreds of gold deposits that aren’t being mined because there is no infrastructure in place. We are talking about the basics like, electricity, water and roads. Electricity in a remote location can be three to four times higher; and then there is diesel, lubricants and explosives to push the operational costs even higher. Some countries make concessions for mining investors by offering to improve infrastructure but most of the time, it’s the mining companies who shoulder everything.
Labour represents more than 50% of a mine’s operations. Mining is not an attractive career move for most people but in some countries, miners get paid more than just minimum wage. In Canada for instance, mines workers get paid more than average labourers in the manufacturing sector and wages are rising. For instance Barrick Gold paid $192/ oz. in 2010 and that increased to $304 an ounce for labour in 2015.
Gold recovery costs
Extraction of gold from ore can be complicated and expensive. A lot of mines have failed to find a balance between input costs and cost of recovery or extraction. Gold is extracted using a cyanide leaching method that was first created by L. Elsner in 1894. However, cyanide extraction is expensive and it has long lasting environmental impacts when it is in the mine tailings. Low-grade gold miners have been taking advantage of heap leaching. Heap leaching requires less equipment compared to cyanide extraction and it is less environmentally devastating as Cyanide.
The important lesson here is for miners and mining operation investors cash costs are important however, there is still profit to be made for low grade gold with the right equipment and cost-effective operation.