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Record Gold Prices Not a Cure for Miners

(Article updated with executive comments and gold price information.)

HOLLYWOOD, Fla. ( TheStreet ) -- Gold mining companies raked in the cash in 2010 thanks to record-high gold prices, but rising costs are likely to be a growing threat this year despite gold reaching record highs.

The chief executive officers of major gold mining operations have gathered here this week for the BMO Capital Markets 20th Global Metals & Mining conference. Many took the time out of the conference to meet with TheStreet to discuss the headwinds their companies are facing this year, which include rising raw material costs, higher labor pay, escalating taxes and exchange rate problems.

Many of these executives have recently reported strong fourth-quarter earnings results that were largely fueled by gold prices hitting a then-record 2010 intra-day high of $1,432.50 an ounce.

While good news for investors, the dominant theme that emerged from those results centered around the rising battle between higher revenues and steeper input costs. Cash costs are the lifeblood of miners. The more money it takes to produce an ounce of gold, the weaker their profit margins.

A gold miner who can sell gold near spot price, assuming that the gold is particularly high grade, can make almost $1,000 in profits if cash costs are close to $400 an ounce. But that number seemed hard for some companies to achieve, and that number is even harder to achieve when you look at total cash costs.

Most companies think of cash costs as how much it takes to produce an ounce of gold. Gold companies sell secondary metals like silver or copper that are the by-products of gold mining to help offset the cost of mining gold. That accounting can also cloud the picture.

It cost Yamana Gold (AUY - Get Report), for example, $465 to produce an ounce of gold in the fourth quarter, but counting its by-product credits that number was negative $34, which incidentally is expected to jump to$250 in 2011 as rising input costs catch up to the company.

Taking into account total costs -- or operating costs plus capital expenditure plus exploration costs -- muddies the issue further. The industry average is around $900 to $1,000, which puts profit margins in a whole new light.

"You've got to look at the overall cost of producing an ounce," says Nick Holland, CEO of Gold Fields (GFI - Get Report), "including sustaining growth capital and combining the two, GNA, operating costs, etc." Gold Fields estimates that total costs could be between $750 to $1,050 an ounce in 2011.
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