Are Cash Costs For Gold Producers Rising Or Falling?
Two reports released this week provide conflicting results on the issue, with one saying that capital costs to build mines have stabilized, and the other saying that the average cost to produce an ounce of gold has risen nearly 12 percent this year.
One of the most significant factors impinging on the profitability of gold producers currently is rising cash costs. That, combined with a diminishing gold price, has squeezed the profit margins of major companies and led to huge writedowns by such industry stalwarts as Barrick Gold (NYSE:ABX,TSX:ABX), Newmont (NYSE:NEM) and Newcrest (ASX:NCM,TSX:NM).a As to whether the cost picture is improving or worsening, the results are mixed.a The Financial Post reported on Tuesday a report by RBC Capital Markets, that said "capital costs to build mines appear to have stabilized across the industry in 2013 after rising 60% from 2009 to 2012." The report's authors say they expect costs to fall 5 to 10 percent in 2014 due to higher productivity and lower activity levels. All-in costs could fall by around $150 an ounce to an estimated $917/oz due to cost-cutting measures and the start-ups of lower-cost mines, notes the Post. "It could be a good time to build projects, as was the case in 2008-2009; however, based on the current cost structure and gold price it is challenging to find gold projects with potential to generate robust [returns]," the newspaper quotes from the RBC report. It said a gold price of at least $1,400 an ounce will be needed to generate "robust returns" for gold companies, but that 80 percent could generate positive free cash flow next year at $1,300 gold. However another report by Citigroupa(NYSE:C), also released this week, said that at a gold price of $1,320 per ounce, up to 98 percent of gold companies would be cash-flow negative. What's more, said the report quoted in The Motley Fool, while the gold price has fallen around 20 percent between June 2012 and June 2013, the average cost per ounce of gold produced has risen 11.8 percent from $675 to $754/oz.