overview of mining costs - india international gold … group overview of... · overview of mining...
TRANSCRIPT
Overview of Mining Costs
24 August 2012
30 Broad Street, 37th Floor
New York, NY 10004
www.cpmgroup.com
Rohit SavantSenior Commodity [email protected]
Outline
1. Factors Influencing Cash Costs
2. Major Cost Components
3. South African Gold Mining
4. Metals Prices and Costs
5. Costs and Mine Supply
Primary Factors Influencing Cash CostsPrimary Factors Influencing Cash Costs
Two Distinct Set of Factors Drive Mining Cash Costs:
� The first set of factors relates to the actual costs of inputs: Skilled labor,
mining materials, equipment, reagents, structural steel, and everything else
that goes into running a mine.
� The second set of factors relate to the price of the underlying metal of
the mine.the mine.
• higher metal prices encourage mining lower grade properties driving
higher the cash cost curve
• the price of the metal also influences input costs
Other Factors Influencing Cash CostsOther Factors Influencing Cash Costs
Deep-Level Mining Boosts Cash Costs
� This type of mining inherently pushes higher the mining cash costs
because
• Of the need for more skilled labor (to deal with increased
complexities associated with such mining)
• Intricate infrastructure
• Increased electricity costs (for cooling deep underground shafts)• Increased electricity costs (for cooling deep underground shafts)
• Overall increase in overhead and maintenance costs
� In the case of some metals, like platinum, depth of mining is rising as
metal available at shallow levels has for the most part already been
extracted.
Reduced Production Raises Cash Costs
� There is an inverse relation between the level of production and the per
ounce cash cost.
� Higher production helps reduce the fixed cost components.
� Lower production can result from:
• Safety related production stoppages• Safety related production stoppages
• Technical problems
• Lower grades
However…
� Most cash cost components are variable costs.
� As a result of this, the rate at which these costs rise (input cost inflation)
plays an important role in influencing the overall cash costs
Input CostsInput Costs
Labor Costs are the Largest Mining Cash Cost Component
Other
Consumables Typical Gold Mining Cash Cost Breakdown
Component Range Typical
Typical Gold Mining Cash Cost Breakdown
Labor
Fuel
Utilities
Parts and Supplies
Component Range Typical
Labor 30% - 55% 50%
Fuel 8% - 10% 9%
Utilities 8% - 11% 10%
Parts & Supplies 8% - 15% 12%
Consumable 14% - 23% 7%
Other 7% - 15% 12%
100%
South African Gold Mining Cash CostsSouth African Gold Mining Cash Costs
Wages Have Been Rising Faster than the Benchmark
4
6
8
10
12
14
16
4
6
8
10
12
14
16
Premium/Discount to Benchmark
Benchmark
Percent Percent
Wage Inflation: Benchmark and Premium/Discount of Actual Wage Increase to Benchmark
� The benchmark is
inflation plus two
percent.
� Premium/Discount is
the difference between
the actual average
-6
-4
-2
0
2
-6
-4
-2
0
2
01 02 03 04 05 06 07 08 09 10 11 12
the actual average
wage inflation less the
benchmark.
Sharp Increases in South African Electricity Tariffs
25
30
35
25
30
35
Eskom's Annual Electricity Increases
Annual Increases in Eskom's Electricity Tariff Rates
Percent Percent
0
5
10
15
20
0
5
10
15
20
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12p
Methodology to Calculate Input Cost Inflation
� Determine the inflation of each component.
� This inflation then needs to be weighted by the weighting of that
component in the cash cost breakdown.
� The sum of the above then needs to be weighted by production at
• Mine level
• Country level
Price of Underlying MetalPrice of Underlying Metal
Gold: Near a Cyclical Peak in a Secular Bull Market
1,200
1,400
1,600
1,800
2,000
1,200
1,400
1,600
1,800
2,000S/Ounce S/Ounce
Quarterly Average Gold Price, Forecast through 2013
Forecast (2014 - 2021)
Average Price of Gold: $,1684
Gold prices are
expected to remain
high by historical
standards, going
forward.
0
200
400
600
800
1,000
1,200
0
200
400
600
800
1,000
1,200
68 73 78 83 88 93 98 03 08 13
Historical Long-
Term Average Price of Gold: $403
Historical (2002 - Q2 2012)
Average Price of Gold: $790
Investment Demand
• Investors have been purchasing gold for a variety of reasons over the past decade.
Just some of these reasons are:
- increased concerns regarding major reserve currencies
- two recessions in the past decade (2001, 2007-2009)
- negative real interest rates
- concerns of inflation
- poor management of issues related to trade, debt, and deficit imbalances - poor management of issues related to trade, debt, and deficit imbalances
•These problems are real and some are expected to take several years to be resolved.
• Investors are expected to continue adding to their holdings in historically large volumes!
•They are not, however, expected to chase gold prices higher as was seen during the past
few years. Instead investors are expected to add to their holding on prices declines.
•This is expected to both weigh on gold investment demand and the price of gold.
Inverse Relation between Gold Price and Gold Grades
800
1000
1200
1400
8
10
12
14
Grade Gold Price (RHS)
Grams/Metric Tons $/Ounce
0
200
400
600
800
0
2
4
6
8
51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
Gold Mining Has Become Extremely Profitable Again
1,400
1,600
1,800
1,400
1,600
1,800
The Price of Gold and Cash Operating Costs of Production
Quarterly, Through Fourth Quarter 2011
$/Ounce
Gold Price
$/Ounce
CAGR:
20%
700
800
900
1,000
700
800
900
1,000
$/Ounce $/Ounce
Margin between Gold Price and Total Production Costs and Cash CostQuarterly, Through Fourth Quarter 2011
0
200
400
600
800
1,000
1,200
0
200
400
600
800
1,000
1,200
02 03 04 05 06 07 08 09 10 11
Cash Cost
Production Cost
CAGR:
13%
CAGR:
14%
0
100
200
300
400
500
600
700
0
100
200
300
400
500
600
700
02 03 04 05 06 07 08 09 10 11
Gold Price minus Total Cost
Gold Price minus Cash Cost
Gold Mining Cash Profit Margins in the 1980 and 1990s
1,200
1,400
1,600
1,200
1,400
1,600
Gold
$/Ounce $/Ounce
The Price of Gold and Cash Operating Costs of Production
Annual Data, Through 2011
700
800
900
1,000
700
800
900
1,000
$Margin between Gold Price and Cash Cost
Annual, Through 2011
$/Ounce $/Ounce
0
200
400
600
800
1,000
0
200
400
600
800
1,000
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
Gold
Cash Costs
0
100
200
300
400
500
600
0
100
200
300
400
500
600
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
Cash Costs and Mine SupplyCash Costs and Mine Supply
Most Gold Production Is Profitable Below $1,000
90% of global gold production
from primary gold mines was
produced at cash costs lower
than $1,033 per ounce during
the third quarter of 2011.
The flatness of the gold cash
cost curve makes gold
$1,600
$1,800
$2,000
$2,200
$2,400
$1,600
$1,800
$2,000
$2,200
$2,400
Cash Cost /Ounce Cash Cost /Ounce
Annual Average Gold Price in 2011 = $1,569
Gold Mine Cash Costs in 2011
cost curve makes gold
production relatively less
sensitive to changes in the
price of the metal.
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Weighted Average Cash Cost = $621
Cash Costs and Mine Production
There is a lag effect
between the margin
between cash costs and
prices and the
increase/decrease in
supply
40
48
56
64
72
80
500
600
700
800
900
1,000
Margin
Mine Production (RHS)
$/Ounce Million Ounce
Gold Mine Production and the Margin between the Gold Price and Cash Costs
0
8
16
24
32
0
100
200
300
400
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
Gold Mine Production Forecast to Rise
20
25
30
35
20
25
30
35
Post 2015
2015
2014
Estimated Annual Gold Mine Production Capacity Gross Additions
Mln. Oz. Mln. Oz.
0
5
10
15
20
0
5
10
15
20
2011 2012 2013 2014 2015 Post 2015
2013
2012
2011
Note: Post 2015 data refers to 2016 through 2021.
About CPM GroupAbout CPM Group
ConsultingInvestment
Banking
Commodities
Research
Asset
Management
Commodities
Management
Research
COMMODITY RESEARCH PRODUCTS
ANNUAL YEARBOOKSSPECIAL STUDIES LONG TERM OUTLOOKSMONTHLY
ADVISORIES
27
Thank You
Rohit Savant
Senior Commodity Analyst
CPM Group
1-212-785-8320
www.cpmgroup.com