Gold-Silver Ratio and Mining Costs

It's easy enough to calculate the current ratio or look at charts showing the trend over the years, but how do production costs come into play?

An acquaintance who deals with bullion tried to explain it to me once. Something like the costs to extract, purify, and process the metals. I think he told me that gold costs $1100-$1200 per ounce to get it to market. Does that sound anywhere close to being accurate?

What about silver?

 

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In the ballpark...I have sell-side research reports that go into this in-depth that I can post if anybody wants to see it.

Cash costs for the most efficient miners are usually $500-$750/oz. But total costs are easily double that, sometimes triple.

Mining has destroyed so much shareholder value the last 5-10 years it isn't funny. If you told most people that gold would double or triple or quadruple in a decade but gold stocks would do horrible they wouldn't have believed you.

 

Here are some very recent figures.

For 2015, production at Wassa mine is expected to be in the range of 105,000-120,000 ounces of gold, while at Bogoso it is expected to be in the range of 145,000-155,000 ounces of gold. Cash operating costs per ounce at the Wassa mine is projected to be in the range of $850-$990 and at Bogoso it is expected to be in the range of $870-$960.
http://finance.yahoo.com/news/golden-star-updates-fy14-production-224010361.html


The Wharf mine is situated in the Black Hills mining district in Lead, SD. Expected production capacity for the mine in 2015 is 85,000–90,000 ounces of gold at an all-in sustaining cost ranging between $800 and $875 per gold ounce. The mine is expected to reduce the consolidated unit costs of Coeur and add a consistent source of production to its portfolio.
http://finance.yahoo.com/news/goldcorp-gg-announces-divestiture-wharf-230011942.html

There are others, mostly in this range. There is quite a large amount of consolidation and expansion of current operations in the mining group.

 

So of course, the next question is: how low can gold possibly go if the production costs remain the same?

 

Gold to financiers is a commodity, and as such, for a solid producing company ( as compared to exploratory), there are paper leverage devices which can allow keeping the plant and personnel working, even if the price drops below cost for several years. It would severely limit current cash flow, but the geologists know the capacity of the mine, and such an investment would have to be longer term than currently.

Gold to those ,who plan to hold forever as a currency protection, should be buying increasingly as the price decreases, and this should provide support as the price decreases, but the amount purchased is insufficient to do so, and psychological drive to do so wanes, as prices drop under their last buy, so it is the paper market which will prevent the mines from closing down completely, but more consolidation will go on, and then these individuals ( paper holders, contracts, options) will be the big winners when gold prices go up again.

In my thoughts, such a drop below or near the production costs favor greatly those who have a large reserve , credit, and long time period and unfortunately , it is those who depended on hard commodities for their 'life investment' who will be the unfortunate ones.

To be successful, one has to read all of the technical and financial papers and reports on the company websites. I prefer Canadian registered companies as the oversight seems preferable over the SEC.

 

Probably down to $750/oz, the average for cash costs for most of these firms.

With the debt they all have and the HORRIBLE economics of the mining industry the last 5-10 years, these guys cannot survive another meltdown.

Personally, I wouldn't mind buying some FCX in the low single-digits.

 

Gold prices could go as low as demand lets it. If you are trying to figure out if gold has bottomed, I wouldn't look at production cost for that.

 

Cash cost is an excellent forecasting tool. Below cash cost, you are losing $$$ as you mine which for a debt-laden company, is NOT sustainable.

Supply can overshoot leading to a price (temporarily) lower than cash cost, but not much lower and not for any length of time.

Below $1,000 an ounce, you buy gold aggressively. At $750/oz. you back up the truck.

 

We have a large mine nearby that has the following on it's report:

"Golden Sunlight produced 92,000 ounces of gold in 2013 at all-in sustaining costs of $906 per ounce. Proven and probable mineral reserves as at December 31, 2013, were 196,000 ounces of gold."

This tells me they are nearing the end of their reserves. Which explains the radio commercial I heard just this weekend that they are now offering off site refining services to other mining operations.

 

What's the public company ? You never know how they define 'all-in'...could be close to cash costs or it could also include amortization of previous CAPX and OPEX.

 

wouldnt as the market price drops, as weve been witnessing, drive consolidation until it reachesa point where consolidation is efficient enough for mineral reserves to be at least 100% of prductio causing the price to rise again? thats not accounting for advances in technology or international conflicts (economic/militaristic) in the unforseen future. im not saying overnight but over a decade or three.

 

The problem is this entire industry has been so mismanaged they make the airline operators from the 1980's, 1990's, 2000's look like geniuses.

The companies have too much debt to consolidate except with stock-for-stock deals at little or no premiums. The selling management doesn't want to give up their perks/jobs for no big gain.

Not sure what you mean by "mineral reserves to be 100% of production causing the price to rise." You need greater demand (India, China) and probably a falling dollar. If the dollar has begun another 7-year up cycle, that bodes poorly for gold and we might re-touch the 2008 low of $750/oz.

You also need to see central bank selling abate.

 

lol uhbwhat i meant by mineral res. being at 100% of production is thatnwhatever number of ozt produced by a company that a balance of profit say 25% of raw material produced will complement the other 75% or minerals still in the ground. hope that clarifies.

 

Still not sure, but production, production costs, and mineral reserves are not really correlated among themselves nor to the gold price.

The problem is that both total production and cash-costs have simply skyrocketed the last decade. The same factors that contributed to a rising gold price (good) also led to huge increases in CAPX and OPEX (bad).

If you want a rising gold price, you want a cessation of central bank selling, global inflation (highly unlikely), a falling dollar (not likely), or bankruptcies/consolidation of some major gold producers. Nobody is going out of business, taking out supply.

 

Alot lower...probably to $750/oz, right at the TRUE cash cost, not the ones cited by companies to placate shareholders.

You need to see 'blood in the streets' before you see rational use of capital.

 

goldfinger: that was awesome, i had to reread that a couple of times just to understand it, you spittin mad game there.lol ok, one question what is TRUE cost? also i thought certain companies will have a gold deposit and sit on it for years because the amount produced by said deposit woul actually drop market prices? its been awhile since economics class and im enjoying the educational experience here.

 

The gold price went up 6-fold between 2002 and 2011 and virtually all mining companies saw their stock prices go DOWN or do nothing.

Tens of billions of CAPX on gold mines have been written off. Entire projects have been mothballed. Stock prices have round-tripped back 10-12 years, even though the price of gold is 4x higher.

These guys undertook tons of CAPX when gold was over $1,500/oz. Net debt was a few billion for most of the 2000's....today a bunch of the biggest gold firms has closer to $30 billion in debt and debt/EBITDA (a measure of leverage) ratios double a decade ago.

These guys ALL have to produce to service their debt. They all want SOMEONE ELSE to stop producing and mining -- not them. It's a game of chicken but they all may get run down trying to cross the road.

Mark Twain once said that a gold mine was a hole in the ground with a liar near the opening. You look at how the CEOs of these companies have been stewards of their shareholders capital and you know what Twain was talking about.

 

Interesting numbers posted here. I guess it goes a long ways in explaining the moth-balling of most of the gold mines locally. I would imagine if I see them begin to re-open, it might mean gold is on the rise, as I don't see production cost coming down ever.

 

if mining costs are in the $700 - $900 range - it makes you wonder how we ever mined gold pre 2002.

i think the answer to the question posed is purely spectulative. its like asking which way to the stock market is going to go. you can get data to support either claim but no one knows for sure

 

So many of these mines were uneconomical except under totally unrealistic assumptions. Some of the purchase prices were doublt, triple, or even quadruple what would have been a realistic price to make money on it.

It's like if you live in a house worth $250,000 and someone offers you a bank check for $1,000,000. That's how insane the prices for gold properties were, esp. in South America.