One way a mining company can remain profitable while dealing with much lower gold prices is by “High Grading.” However, this does not seem to be taking place as the top 5 gold producers average yield continued to decline in the first half of 2013 as gold prices fell to new lows.
High grading is a method by which a company decides to extract higher grade ore in the mine for the short-term to increase production as well as lower costs. Unfortunately, this technique leaves a great deal of gold ore in the ground (as future waste) that may not be commercially viable to extract in the future.
The diagram below shows two different ways a company would mine a deposit:
Scenario A on top shows extracting the ore according to the mining plan. Even though there is a great deal of waste the average grade is 2.39 g/t for 56 million tonnes producing 4.1 million oz of gold.
Scenario B on the bottom shows how the company would instead mine the high-grade ore which is now an average of 4.1 g/t for 23 million tonnes resulting in 2.8 million oz of gold. However, it leaves a remaining ore body of 37 million tonnes with a much lower average ore grade of 0.92 g/t. Even though there may be 1.3 million oz of gold in this ore body, it may not be profitable to mine it in the future.
So, what happens is that the mine can produce more gold at a lower cost in the short-term, but it destroys both its profitability and production in the future.
Ever since the price of gold declined in the first half of 2013, analysts have been stating that the gold miners may indeed increase gold production by this method of high grading.
In the short-term Hambro predicts production might actually tick up as gold companies seek to reduce costs by mining higher grade gold where they have the flexibility to do so.
He believes that while that scenario might preserve the production level for now, if the current gold price remained subdued, production could start to fall quite aggressively within the next few months…
Then on the other hand, Vitaly Nesis, CEO of Polymetal in Russia stated the following in a Kitco News Interview (Sept 24th):
“Obviously cost cutting is important but I think the emphasis in the industry is misplaced,” Nesis said. “I think capital efficiency is much more important than cost cutting.”
Nesis went on to say that, “the most traditional response to declining gold prices in a bid to reduce costs is high-grading, indiscriminate labor reductions and exploration cuts, which are misguided. I think that high-grading is something that an irresponsible mining company would do – we will not high-grade.”
Here we can see that some gold mining CEO’s will not resort to high grading to keep their companies profitable. It will be interesting to see the figures coming out during the third quarter of 2013 if indeed the top producers decided to switch to mining higher quality ores.
According to the data I collected from the top 5 gold producers, average yields continued to decline in the first half of 2013 compared to the same period last year. First, as we can see from the chart below, gold production from the group fell 3% from 10.74 million oz 1H 2012 to 10.43 million oz in 1H 2013.
The three losers were Barrick, Newmont and AngloGold where production dropped a total of 500,000 oz y.o.y. On the other hand, GoldCorp and Newcrest added 200,000 oz compared to the same period last year.
Second, the average gold yield from the group declined from 1.17 g/t during the first half of 2012 to only 1.04 g/t in 2013. The main reason for this huge decline in average yield was due to Barrick processing 9% more ore while their recovery rate declined from 88.8% (1H 2012) to 83.8% (1H 2013) and AngloGold increasing their surface and dump reclamation processing 6 million tonnes (1H 2012) to 17.6 million tonnes (1H 2013).
(NOTE: grade is the amount of gold contained in the ore, while yield is the gold recovered after mining and processing).
Furthermore, yields fell in to a lesser extent in the other producers due to the natural decline of ore grades impacting the industry as a whole. Newmont saw its average grade in its Nevada operations fall from 0.075 oz/t (ounce/ton) in 1H 2012 to 0.067 oz/t in 1H 2013. In addition, Newmont’s Yanacocha mine’s average grade at its milling operations fell from 0.158 oz/t in 1H 2012 to only 0.136 oz/t in 1H 2013.
GoldCorp was the only producer that kept its average gold yield the same at 0.74 g/t for both periods.
The evidence shows that as the price of gold declined substantially in the second quarter of 2013, the top 5 gold producers did not change their strategy by mining higher grade ore.
I doubt many of these companies will turn to high grading to help offset falling gold prices. It just doesn’t make economic sense. Things are much different today than they were say 5 or 10 years ago.
Again, it will be interesting to see what decisions these top gold producers made during the third quarter as it pertains to the mining operations. The results for Q3 2013 will be coming out by the end of October in which I plan publishing an update.