We then turned to the world's top 10 largest operations, a more representative operation, and tallied their grades since 1998.
The picture here is more telling. Since 1998, gold grades of the world's top ten operations have fallen from 4.6 g/t gold in 1998 to 1.1 g/t gold in 2012.
This does indeed look like Peak Gold, in terms of the easier-to-find, higher-grade production having already peaked, but it's not as concerning as you might think. As gold prices increased from $302 per ounce at the end of 1998 to the latest price of $1,377, both low-grade areas of existing operations and new projects whose grades were previously unprofitable became potential winners.
Expanding existing operations into lower-grade zones near an existing operation is the cheapest way to increase revenue in a rising gold price environment. So many companies did just that.Indeed, the largest gold operations -- the type we included in the above chart -- would be the first ones to drop their gold grades when prices are higher, simply due to the fact that what they lose in grade they can make up in tonnage run through existing processing facilities. Larger size allows lower-grade material to be profitable because of economies of scale. New technologies have helped to make lower-grade deposits economic as well. So, at least until 2011, the conventional wisdom of "grade is king" was being replaced by "size is king." However, production costs have been increasing as well--and have continued increasing even as metals prices have retreated in recent years. Rising operating costs and capital misallocations (growth for growth's sake, for example) are at least partly to blame for miners' underperformance this year. Suddenly, grade seems to be recovering its crown. It remains to be seen whether more high-grade discoveries can actually be made, or whether Peak Gold is actually behind us.
The TakeawayTruth is, there is no king. Grade and size, although among the most important variables in the mining business, tell only part of the story. Neither higher grades nor monster size prove profitability by themselves -- the margin they generate at a given point in time is what matters most. And then what the company does with its income matters, too.
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