THE FRAGILE GOLD INDUSTRY: Gigantic Equipment, Massive Capital Expenditures & Rising Costs

The gold industry has been built on the leveraging of debt and energy.  The days of using human and animal labor to produce the precious yellow metal are long gone.  While some gold is still mined the old fashion way, the overwhelming majority is produced by using colossal-sized mining equipment, massive amounts of capital, energy, and materials.  Thus, the global gold supply comes via a very complex industry with a lot of moving parts.  When one of these critical parts are in short supply or removed, then the entire gold supply system disintegrates.

An example of one of the newest complex gold mines in the world is the Pueblo Viejo Mine in the Dominican Republic, owned by Barrick (60%) and Goldcorp (40%), which cost a staggering $3.7 billion to build.  The Pueblo Viejo Mine started production in 2013 and is now running a full capacity.  Gold production at the Pueblo Viejo Mine is over one million ounces per year.  According to Barrick, it’s cost of sales at Pueblo Viejo was $564 an ounce in 2016.  However, cost of sales does not include “all costs.”  We must also factor General and Administrative, Exploration-Evaluation, Mine Closure and Income Tax expenses.

However, these additional expenses do not include the initial $3.7 billion cost to build the mine.  According to data, the Pueblo Viejo Mine has approximately 15.5 million oz (Moz) of proven and probable gold reserves.  Even though additional gold discoveries at the mine will be added in the future, if we assume a 15-year initial payback period, the annualized capital cost would be an extra $250 per oz of gold produced.

Thus, the $564 cost of sales plus $250 capital cost now equals $814 an ounce.  But, this does not include the additional expenses which would push the actual total cost from the Pueblo Viejo Mine over $900 an ounce.  This is just my simple calculation which shouldn’t be compared to the industry’s more complex accounting of Net Present Value.  Even though the Pueblo Viejo Mine is Barrick’s lowest cost gold mine in the company, Barrick’s total cost to produce gold last year was $1,125, based on the $1,251 spot price.  Again, that is my simple “Net Income Break-Even Analysis.”

Regardless, the Pueblo Viejo Mine is a very advanced complex mine that processed 7.5 million tons of ore to produce the 1.1 Moz of gold last year.  According to Barrick’s 2016 Sustainability Report, the Pueblo Viejo Mine consumed the following in 2016:

Pueblo Viejo Mine Materials & Energy Consumed:

  1. 4.9 billion gallons of water
  2. 3,100 metric tons cyanide
  3. 338,000 metric tons lime
  4. 18.7 million GigaJoules of Energy (3.1 million barrels of oil equivalent)

There are many other materials not included in that list above, but the ability to produce gold at the Pueblo Viejo Mine is only possible from a very complex supply chain.  The majority of materials and energy consumed by the Pueblo Viejo Mine has to be transported to the Dominican Republic Island in the Carribean.

For example, Barrick’s mining equipment fleet at the Pueblo Viejo Mine includes following (info from OSIsoft Report):

  1. (34) CAT 789 Haul Trucks
  2. (2) Hitachi 3600 Shovels
  3. (3) CAT 994F Front Loaders
  4. (30) Support equipment

The estimated maintenance budget for just the haul truck fleet is $18 million.  And when one of the 34 trucks goes out of service, it cost one hell of a lot of money.  The truck downtime cost is $700 per hour.  The six tires the CAT 789 Haul truck uses cost approximately $30-40,000 a piece and last a little more than a year.  The CAT 789 Haul truck gets about 0.3 miles per gallon.

(CAT 797F transported by Mercedes Semi-tractor)

Now, the featured picture (above) that I used for this article is not the CAT 789; it is the CAT 797.  The CAT 797 weighs twice as much as the CAT 789, used at the Pueblo Viejo Mine.  However, I just wanted to give an idea of just how big these haul trucks can get.

Furthermore, the mining, excavating and hauling of ore out of the Pueblo Viejo Mine is controlled by high-tech computerized systems.  The hauling of the ore by the large truck fleet is monitored by state of the art technology that designs the most efficient method to remove the ore out of the mine, so very little time is wasted.  Again, time is money.

We must remember, the more technology that is used in a system, the more complex and fragile it becomes.  Of course, technology is great at making large operations run more efficiently and faster, but the downside is that if one or more critical parts are removed, the complex mining system breaks down.  What would happen to gold production at the Pueblo Viejo Mine if cyanide becomes in short supply?  Without cyanide, the processing of gold ore grinds to a halt.

While I have provided one example of the enormous cost and massive amounts of capital needed to produce gold at one mine, let’s take a look at what is going on at the top 8 gold mining companies in the world.

Top 8 Gold Mining Companies Costs & CAPEX Spending Surge

It is quite amazing how much more it costs to produce an ounce of gold today than it did at the beginning of the century.  The huge rise in the total cost to produce gold is why the price is nearly five times higher.  Unfortunately, many precious metals analysts suggest that the increase in the gold price is due to either market sentiment or increased demand.  I have stated in several articles that the tremendous increase in the gold price was due to the rise in the price of oil:

However, there are additional factors that also impact the cost to produce gold.  For example, the gold mining industry now has to move a great deal more ore to produce the same amount of gold it did in 2000.  The next chart shows the falling yield in the top gold mining industry from 2005 to 2013:

In just eight years, the top five gold miners experienced a near 30% decline in average gold yield from 1.68 g/t (grams per ton) to 1.2 g/t.  If we went back five more years to 2000, I would imagine it would be closer to a 40% decline in average yield.  Thus, it now takes the processing of 40% more ore to produce the same amount of gold today.  Which means, it now takes a hell of a lot more energy and materials to produce gold today than it did 16 years ago.

This next chart puts into perspective the increased cost to produce gold today versus in 2000:

This graph shows the increase “Cost of Goods Sold” for producing gold at the top 8 gold mining companies in the world.  Even though many of the companies have seen a decline in the Cost of Goods Sold since the peak in 2013, the overall figure is still much higher than it was in 2000.  Some of the companies included in the chart above have seen their Cost of Goods Sold increase significantly because they increased their gold production substantially.  However, Barrick did not have that excuse.

Barrick produced 5.9 Moz of gold with a $553 million cost compared to $5.4 billion in 2016 on 5.5 Moz of gold production.  Here we can see that Barrick’s Cost of Goods Sold increased ten times while production is about the same.

According to the data at YCharts.com and these companies’ annual reports, the total Cost of Gold Sold in 2000, was $4.9 billion ($4,953 million) versus $23.6 billion ($23,588 million) in 2016:

Now, what is amazing about the figures in the chart above is that the Cost of Goods Sold figure has more than quadrupled while total gold production in the group only increased by 2 Moz.  The top 8 gold miners Cost Of Goods Sold increased from $206 per oz in 2000 to $907 last year.   The huge increase in cost to produce gold is the very reason the price surged from $279 in 2000 to $1251 in 2016.  Let’s look at the comparison:

Cost of Goods Sold vs. Gold Price:

2000 vs. 2016 Cost of Goods Sold = 4.4 times increase

2000 vs. 2016 Gold Price = 4.5 times increase

So, if we removed all SUPPLY & DEMAND forces from the equation, it is quite surprising that the gold price is up by the same amount as the cost to produce gold.  However, we need to also look at the rise in capital expenditures.  During the same period, the top 8 gold miners total capital expenditures increased from $1.7 billion ($1,723 million) in 2000 to $6.1 billion ($6,088 million) in 2016:

Again, we can see that total capital expenditure (CAPEX) increased from $72 per ounce in 2000 to $234 an ounce in 2016, while overall production only increased by 2 Moz.  The group’s CAPEX spending only increased 3.2 times versus the 4.4 times in the Cost of Goods Sold, but it shows that it cost a heck of a lot more money to sustain or replace production.

If we understand that the present value of gold is tied to its cost of production, then we would realize it has a PRICE FLOOR.  Sure, the gold price could spike lower, but its average annual price has remained close to (or above) its cost of production for quite some time:

This chart represents my “Adjusted Net Income Breakeven Analysis” for Barrick and Newmont, the two top largest gold companies in the world.  As I also mentioned above, Barrick’s cost to produce gold in 2016 was $1,125 when the spot price was $1,251.  Thus, the market has priced gold above its cost of production (in these two companies) since at least 2000.

Lastly, the gold mining industry needs a vast amount of materials, parts, energy as well as a very complex supply chain system to produce the precious yellow metal.  If one part of the supply chain breaks down, then it becomes extremely difficult or impossible to produce gold.  While there are many fragile aspects of the modern high-tech gold industry, I believe ENERGY is the most crucial.

Once the world starts to experience a decline in global oil production, the vast supply chain system will begin to break down.  This will impact the largest mines the most.  I will be writing more about this subject matter and also why a declining global oil supply will push the price of gold up much higher.

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58 Comments on "THE FRAGILE GOLD INDUSTRY: Gigantic Equipment, Massive Capital Expenditures & Rising Costs"

  1. Maybe, but the opposite is also true: gold can always be driven down to the cost of production. Because the banks are virtually unconstrained in how much paper contracts they can create.

    Therefore, it is now all but useless to speak of a gold bull market. It has already been demonstrated that they have all the tools needed to suppress sentiment, while encouraging bubbles in stocks, real estate, and bonds.

    Too late.

    • You can´t suppress sentiment forever, or give me 40 dollar gold like when f….ng Nixon defaulted the whole world.

      • What is the status of the class action lawsuit whereby Deutsche Bank already rolled over and paid a huge fine. Anybody know the current status against the other gold cartel banks? It would seem the CEO’s of these companies should sue the gold banks as well on behalf of shareholders.

    • reto lechmann | November 4, 2017 at 4:06 am |

      Kostenexplosion im Bergbau.
      Mine von Barock Gold in Pueblo viejo.
      Die Angaben die Herr Angelo mit 7.5 Mio. Tonnen roherz und 1.1 Mio. Unzen Gold gemacht hat kann nicht stimmen. Das wären ja 30 Tonnen Gold. Das Verhältnis stimmt nicht. Kann Herr Angelo das im nächsten Bericht erklären.
      Vielen Dank und Grüße aus der Schweiz (ZÜRICH).

      Translation:
      Cost explosion in mining.
      Mine of baroque gold in Pueblo viejo.
      The information provided by Mr. Angelo with 7.5 million tonnes of crude and 1.1 million ounces of gold can not be correct. That would be 30 tons of gold. The relationship is not right. Can Mr Angelo explain that in the next report?
      Many thanks and greetings from Switzerland (ZURICH).

  2. Very good fundamental analysis of the Gold industry. Very similar to what you did for the Oil industry recently. Impressive data gathering and analysis

  3. A lot of this analysis is absurd! And I don’t say that, meaning to you personally, Steve. I’m talking about the very fact that something that shouldn’t be a very relevant metric showing up as a very strong inference. But it seems contrived & illogical. Let me explain what I’m talking about :

    Had you written a similar article discussing: Silver mining & its cost of production, and mapping the oil price to silver’s cost of production……which itself strongly mapping to the price of silver, I wouldn’t have made above statement. (I believe you did already write many articles discussing these topics for silver mining before.)

    But there are huge fundamental differences between gold & silver. Unlike silver & its many industrial applications, gold doesn’t have that trait. Majority of above ground stocks of gold have been mined from thousands of years to centuries to decades ago durations. Very little of that gold got discarded & mankind has preserved it very carefully. Annual mined gold output all over the world is negligible compared to the pre-existing stocks of gold above ground. Pinning the price of gold that was mined say 80 years ago to the fluctuating cost of production of gold as of today (which itself very strongly maps to price of oil as of today as you have very well illustrated) shouldn’t make any sense. Who cares what happened to the price of oil between February of 2017 to August of 2017, why should that have any effect on determining price of some chunk of gold that was mined back in say 1890s or 1920s?

    I hope I’m making my point clear. And once again, it’s not directed @ you personally Steve. You’ve done a very good job showing why fluctuating price of oil should strongly map to fluctuating cost of production of gold. That portion is completely logical & w/out any dispute. I’m having trouble understanding why that fluctuating cost of production of gold be ***THE STRONG*** determinant for fluctuating price of gold (majority of pre-mined gold since eons ago).

    • Theravaida,

      Actually, I did write an article on the same exact thing for silver; you just haven’t been reading my past articles on this. Let me give you some examples and reading material:

      1) https://srsroccoreport.com/why-most-analysts-gold-silver-price-forecasts-are-wrong/

      2) https://srsroccoreport.com/forensic-evidence-why-silver-price-manipulation-will-end/

      3) https://srsroccoreport.com/silver-investment-switching-from-a-commodity-to-high-quality-store-of-value/

      4) https://srsroccoreport.com/important-silver-key-factors-3-must-see-charts/

      Theravaida…. It didn’t seem like you took a good enough look at the 1940-2016 Gold-Oil Price chart. Also, there is the same chart on Silver-Oil that shows the same thing. I would kindly like to share with you the following GOLD-SILVER-OIL Comparisons:

      1971-1980 SILVER PRICE = Increased 16 Times
      1971-1980 GOLD PRICE = Increased 15 Times
      1971-1980 OIL PRICE = Increased 16 Times.

      So, not only has the price of Gold and Silver moved up the same degree as the oil price during the 1970’s, they did the same thing in the 2000-2016 period.

      Now, I don’t know how you can’t see the Logic in that. Furthermore, while it is true that most of the gold mined is held in vaults across the world, the value of all that gold is based on its current cost of production. The same can be said for silver.

      That being said, the TRUE VALUE of GOLD & SILVER are not based solely on their cost of production. Instead, they should be valued as a HIGH-QUALITY STORE OF WEALTH. Thus, gold and silver are not mere commodities like copper, oil, and tin… but that is how they are being valued currently.

      When the Collapse of global oil production begins in earnest, then we will see GOLD & SILVER RISE to their TRUE STORE OF WEALTH.

      steve

      • “That being said, the TRUE VALUE of GOLD & SILVER are not based solely on their cost of production. Instead, they should be valued as a HIGH-QUALITY STORE OF WEALTH.” To that one can I wholeheartedly agree! …and most certainly the cost of production does not directly deem the AUAG value.

        Now as oil production collapses, the cost and price of oil would increase, (or the value of a dollar decreases) AND HENCE the COST OF GOLD PRODUCTION GOES UP! At the same time, if a dollar decreases in value, then by inference AU-AG will increase in value, probably the same % as the oil.

    • Diogenes Shrugged | October 19, 2017 at 10:54 am |

      Theravaida: A merchant has to at least charge the REPLACEMENT PRICE for his wares — i.e. what it costs him to keep his inventory constant. Gold is no different from other commodities. That replacement price is chiefly determined by the overall costs incurred by the miners and refiners — who merely pass their costs on to the merchant. It matters NOT how large the world’s inventories might be. Besides, those gold inventories are largely sequestered in vaults, and not in circulation. So it’s as if they didn’t exist at all. Unless I misunderstood, your question is a little like asking, “Why do I have to pay for water when there are oceans of it?”

      • Diogenes Shrugged,

        You bring up a very relevant point. Also, have to say, I enjoyed the last sentence in your comment. It seems that a lot of people still don’t understand the FALLING EROI – Energy Returned On Investment and its impact on the global economy. Moreover, most of the Alternative Precious Metals Community still adheres to SUPPLY & DEMAND forces in determining price over an extended period. While SUPPLY & DEMAND forces impact prices on the very short term, they do not on the longer-term.

        For some odd reason, people can’t get around their HEAD that ENERGY creates the very MONEY we use to BID THINGS UP. If ENERGY QUALITY declines, so does the ability to BID UP prices.

        steve

        • Diogenes Shrugged | October 19, 2017 at 1:25 pm |

          Steve, you once wrote,

          “Debt equals unrealized energy obligations.”

          I regard that to be the hallmark quote of our era. The only quote that rivals it comes from Nicole Foss at TheAutomaticEarth.com. She wrote in reference to wind and solar, “The touted alternatives are not energy sources for out current society, because low EROEI energy sources cannot sustain a society complex enough to produce them.”

          Your quote should be permanently engraved and enshrined above the entrances to every single bank on Earth. And permanently tattooed on the foreheads of every single oil industry executive.

  4. “Barrick produced 5.9 Moz of gold with a $553 million cost compared to $5.4 billion in 2016 on 5.5 Moz of gold production. Here we can see that Barrick’s Cost of Goods Sold increased ten times while production is about the same.”

    While I do not dispute the figures, I wonder if something else is going on here. The other miners increased COGS in line with increased production, while Barrick did not. Which leads to… Is Barrick fudging its figures?

    Now, we have all heard rumours, some from quite reputable sources in the gold industry, that supply is tight for the western bullion banks to dump onto the market to suppress prices. Could Barrick be the/a source for some undeclared gold to dump onto the market? The strange figures suggest to me that this is quite possible – the full cost is claimed on the books while much of the physical metal is transferred off the books to another (secret?) entity.

    • … continued from previous comment…

      or is that a covert way for the USG to rebuild it’s gold reserves without being detected?

      In any case there is something funny going on with those Barrick figures.

      • Hmmmmnnnn,

        The Gold Mining Industry, like the U.S. Oil Industry is the most explored industry in the country. The United States is like swiss cheese with all the holes drilled from exploring and producing oil. We must remember, there are these professionals called INDEPENDENT GEOLOGISTS that get paid to look for gold and oil. If there were hidden gold and oil in the United States, these INDEPENDENT GEOLOGISTS would know about it.

        I have had conversations with geologists in both the oil and gold industry, and I can tell you…the BEST HIGH-QUALITY Gold and Oil discoveries have been made and produced decades ago.

        steve

        • I am sorry, you do have a strong argument, but Bix Weir just told me yesterday that there are billions ounce of gold under the Grand Canyon and Alaska has an extraordinary huge untapped super light sweet oil reserve that is enough for 500 year consumption (on the current rate of world consumption). Gold and oil prices will fall miserably, and we will be ruled by ancient aliens.

          • Bukharin,

            Bix told you that… you don’t say. I can honestly tell you, there is one thing that I am in total agreement with Mr. Weir, and that is that the value of gold and silver will rise. That being said, I disagree with him on virtually everything else.

            Now and then when I get a bit bored or in the mood for a chuckle, I play one of Mr. Weir’s youtube videos. As I do my research, I listen intently to his powerful words.

            In one recent video, I gather ole Bix is now giving the HUGE SILVER PRICE RISE a 10-Year window. If the banks don’t lose control of manipulating the price of silver within ten years, then new technology is going to produce silver for next to nothing. I believe ole Bix used the STAR TREK REPLICATOR as an example.

            So, to all you Bix Wier gold and silver investors, you only have ten years to HOPE & PRAY their values increase.

            steve

      • naugh… Perhaps just a bit of an error in the Barrick numbers for 2000 and 2016. I have 3.74mm oz at a production cost of $763mm in 2000, And 5.52mm oz (+147%)at a production cost of $4.4b (+576%) for 2016. hard to make sure you have apples with apples.

        During that time the price of gold went from 300 to 1250 a 416% increase. sooo… While its hard to determine the total of tons mined, I guarantee that the tonnage increased steeply.

        • Antler333,

          Please go back and read my response to Hmmmmnnnn. You will see the reason for the different figures.

          steve

    • Hmmmmnnnn,

      Unfortunately, the figures for the Cost of Goods Sold on Barrick’s Annual Report vs. YCharts.com are different. The number that YCharts stated for Barrick as Cost of Goods Sold was $553 million in 2000. However, I just checked Barrick’s 2002 Report (going back to 2000), and they show $841 million. So, for whatever reason. YCharts was off by $300 million. Now, I use YCharts because they make collecting all this data easily accessible than going to all the annual reports (spending hours and hours). This kind of bums me out because YCharts costs an arm, leg and a foot for their service.

      Regardless, Barrick and YCharts showed the same cost of sales in 2016 at $5,405 billion.

      OKAY… UPDATE. I did a little checking, and it seems as if YCharts used Barrick’s 2000 Annual Report before a merger. According to Barrick’s 2000 Annual Report, Barrick produced 3.7 Moz of gold with a Cost of Goods at $553 million. However, after they merged, they went back and updated their figures for 2000 in their 2000 Annual Report.

      Either way… it’s not that much different in the whole scheme of things.

      steve

  5. That is just a small fleet running a relatively smaller truck (175-180 ton capacity with 1800 HP), I work at a mine that extracts oil that runs 150 trucks of the ultra class size, 360 – 400 ton and 3600 – 4000 HP. The fuel consumption is crazy on those engines, we also have a fleet of support equipment, numbering in the hundreds. All this energy and capital to extract a rather poor quality oil that needs this economy of scale just to stay in business. It tells me the energy sector is actually in a similar poor condition to gold mining as indicated in the article.

    • Holleyman,

      Thanks for the insight. Yes, I have seen some of the information on the Haul Truck Fleets in the Oil Sands operations. I know that several of them use the CAT 797F which can haul upwards of 400 tonnes. The size of the tires on the CAT 797F is 13 feet tall and cost upwards of $45-$50,000 at a pop. When the CAT 797F needs a new set of tires, that can cost nearly $300,000. I have also heard that most of the tires being run at the Oil Sands operations don’t’ make it to their full lifespan due to being damaged from the massive wear and tear.

      Holleyman… I totally agree with you that the Low-Quality Oil Sands operations are quite similar to extracting low-quality gold ore at 1-2 grams per ton.

      steve

      • Diogenes Shrugged | October 19, 2017 at 11:23 am |

        Not to be a knucklehead, but it doesn’t hurt to toss in a reminder. It’s grams per tonne (metric) and Troy ounces per ton (Troy & Avoirdupois units mixed).

        A tonne is 1000 kilograms. A ton (short ton) is 2000 pounds. A Troy ounce is 31.1035 grams.

        Grams per tonne is the same as parts per million.

  6. Gold does not have a price floor. No commodity has a price floor..period. Does oil have a price floor just because most frackers are currently operating at a loss? Of course it doesn’t! It’s a common economic fact that as prices drop businesses react to lower their COGS, but this doesn’t mean that market prices don’t fall below the total cost of production. Prices are determined by supply and demand. The reason why many commodities “seem” to have a floor is because as demand drops, suppliers curtail production either voluntarily or via bankruptcy, thereby reducing supply. This shifts the supply curve such that a new equilibrium of supply and demand is reached at a new market price. Sooner or later I’ll make you a believer!

    • Bob M.,

      While you are welcome to your opinion, you do not seem to understand the ENERGY-MARKET DYNAMICS. Unfortunately, the Austrian School Of Economics has done more harm in teaching people the incorrect theory of SUPPLY & DEMAND that most people can’t get their mind to let go. Kind of like folks who continued to believe the world was FLAT.

      steve

      • Bob is parroting classical orthodoxy (“Thou Shalt Memorise Thy Supply-Demand Curves,” etc.). Deprogramming is particularly hard in the perceived absence of obvious real-world symptoms. Much of what Steve has been warning about is still hidden from the public eye, visible only to those who actually crunch the numbers and do the leg-work.

        On the positive side, most governments are still led by orthodox-thinking policymakers, which is why their pronouncements will come to seem increasingly absurd in time of crisis. The long term benefit should be increased skepticism and critical thinking by the electorate.

    • Bob, Gold is not a commodity. It is a currency. Commodities are consumed, gold is not consumed. It’s treated as a commodity by the West as a way to manage it’s value.

    • Diogenes Shrugged | October 19, 2017 at 12:11 pm |

      Bob M, I thought your explanation was spot on.
      Collapsing EROEI will eventually force gold mining to grind to a halt. The world’s mined supply will therefore eventually stop growing. The price of gold will then increase, but only if the demand remains. There won’t be much demand if the collapsing EROEI also brings global famine, grids down and epidemics. Markets are currently manipulated to generate fraudulent prices, but the forces of supply and demand still exist.

  7. Thank you Steve; What a fantastic message you fired off here!

  8. Keep killing it with your research! Love your articles..!

  9. Steve: You have the cart before the horse when offering that the price of gold follows oil which then increases the cost of goods sold. The opposite is reality, gold (perhaps representing the value of the dollar)pushes oil and is a tad difficult to explain.

    Gold deposits contain measured reserves which are dynamically created DEPENDENT upon the then prevailing or expected gold price (or hedged). Most ore deposits have a high grade core and a lower grade, graduated “rind”. If you expect to have a $1000 gold price then you need to mine rock which hopefully produces more than $1000 in RECOVERED value and makes you a profit after the tabulation of costs. That could be one ton mined at a 1 oz per ton grade, or 25 tons at 0.04 oz/ton recovered. Without being too specific, generally a 1 ton per day mine is a whole lot cheaper to build than a 25 ton per day operation. The cost of construction escalates, as the expected tonnage extracted escalates.

    As the gold price goes UP the average per oz value of mined ore can go DOWN and still make money. i.e. with my 25 TPD mine at 0.04 oz per ton = 1 oz. And my costs are $1000 per oz. This is about $40 per ton mined. But now the gold price goes up to $1500 and (for a time) my costs of production stays the same at $1000 per oz., so I only need $1000/$1500= 66% of my 0.04oz/ton to make breakeven grade. The mine will then lower its cutoff grade to 0.0266 oz per ton, and recalculate the reserves. This enlarges the “proven ounces” with the lower grades which are now economic. They can then mine the same tons and get the about same money $1500X0.0266 = $39.90 per ton but a lower number of oz. recovered, 0.66oz. Most mines usually boost the tonnage mined to keep the oz produced the same. Hence the need for new capital expenditure to capture more of the lower grade “rind”.

    Effectively the gold company will MOVE its production target to a grade which meets the costs plus the desired “profit”. So if the gold price moves higher, the mining company lowers the mined cutoff grade, and TA DA the cost per oz increases to meet the desired level of profitability…. and the mine then has a longer production life using the “NEW” ore, the low grade rind suppling the extra tons. Unfortunately, the reverse is true as well. If the price goes down, to breakeven, the mine must extract a higher grade ore which DECREASES mine life.

    This principal works for all mines ….silver included, albeit affected by base metal credits etc. Further, I would offer that this applies to oil as well. Raise the price of oil high enough, and “NEW” proven reserves will miraculously appear where only strippers or sniffs existed.

    • Antler333,

      I appreciate your comment and opinion, but did you not see the 1940-2016 GOLD-OIL-Chart? Also, as I stated to another commenter, check the following price increases:

      1971-1980 SILVER PRICE = Increased 16 Times
      1971-1980 GOLD PRICE = Increased 15 Times
      1971-1980 OIL PRICE = Increased 16 Times.

      Again, the price of oil surged from $20 in 2000 to $110 in 2011. The Gold price surged from $279 in 2000 to $1,571 in 2011 and Silver increased from $5 to $35. So, we have the following:

      2000-2011 Oil Price = Increased 5.5 Times
      2000-2011 Gold Price = Increased 5.6 Times
      2000-2011 Silver Price = Increased 7 Times

      Now, the Silver price did increase more than Gold or Oil, but it does tend to get very frothy when speculation moves into silver.

      steve

      • I dont disagree with the charts … Yup, the long-term price increases kind of mimic each other. There is a reason for that. But what is it? What is the driver? is it oil moving gold (& silver). Or is it gold (& silver) moving oil. Each is a resource we measure in dollars, each requires capital and expertise to extract.

        Many would say that Gold-silver are a barometer for the perceived value of (strength or faith in)the dollar. But then again, perhaps so is oil. If gold goes up, dollars are cheaper, so then oil is more expensive too, and visa-versa. Neither may be driver, or perhaps both. If the resource is deemed abundant, than that one aint it. However if scarce, then Supply and Demand pressures are a factor. hmmmm

        • HERE would be a good question for ya: Why did the price of oil spike in the early 80s, then again in mid 2000’s and again in early teens? (like gold) Was oil production or usage that variable? I dont think so. Production dropped 4 to 5% in early 80’s, but nothing is obvious in the 2000’s.

  10. Fantastic article Steve. This is very useful information. Spending your time on this type of information surely is many times more important than showing a Tom Cloud or Mr. Baloney’s
    prognostications. One can make plans on pms with this info. Again, good job Steve.

  11. Great article, lots to think about, thank you. We’re so used to measuring all these costs and prices in dollars… but the value of a dollar is not constant. The value of gold is constant. The value of a dollar, as measured by DXY, has moved up and down 20% over the last decade. How can the changing value of the dollar not impact the price of all commodities and mislead long term analysis. IMHO, in an ideal world, everything would be priced in gold, not dollars. Having said that, the current system has given generations of people in the west a vastly improved quality of life and unfair advantage. Although not long term sustainable, I can understand why it’s in our best interest that it lasts as long as possible. As the clock ticks, I wish more of us would use this time to transfer some of our savings into PM’s as a store of value but almost everyone I speak to about PM’s thinks I’m ‘off the track’. Sorry for my off topic rant… always look forward to your articles.

  12. robert sinclair | October 19, 2017 at 8:35 am |

    You are mistaken

  13. Is this right Steve?
    Just the energy to produce 1 Million Oz of Gold at Pueblo Viejo.
    So at least you need 3 barrels of oil to get 1 Oz of Gold!!!
    Damn!!! Feels like a Sin
    4) 18.7 million GigaJoules of Energy (3.1 million barrels of oil equivalent)

    Besides. What do they do with all the waste cyanide and lime?!

    • The cyanide (CN) breaks down into harmless carbon and nitrogen oxides, while the lime is used to neutralize the acidic ore into a benign state.

      • Thanks.
        At least we are not wasting the planet to own some gold.
        And the 3 Barrel of oil per Oz of gold is that right, sounds like too much?

        • No,that perhaps logical …. that would be all the direct and indirect equipment usage and the utilities (electric, gas ???) supplied to the facilities. 3 barrels of oil is worth say $150. Their direct cost is supposedly $564 per ounce. Sooo that suggests that energy is about 25% of the cost of direct production and maybe about 16% of “all in” costs (est $900)

      • Diogenes Shrugged | October 19, 2017 at 12:55 pm |

        The lime is not used to neutralize acidic ore. The lime is to keep the leach solution pH high, and thereby keep NaCN (sodium cyanide) from turning into HCN gas. NaCN is expensive, so you don’t want it escaping into the environment as a highly toxic gas.

        • Yes, I yield to your more correct explanation. I.E. the above mentioned PV mine sits within an oxide cap atop a disseminated and massive quartz-pyrite (iron sulfide) deposit. Sulfide exposed to oxidizing water can make for quite acrid acid water conditions. Acid breaks down cyanide. The lime keep the CN-bearing solutions, circulating thru the ore, at a high pH (basic), thereby stabilizing in solution the CN and its scavenged gold.

  14. It makes perfect sense that a commodity sells near its cost of production. Gold should be no different. It is due to producer hedging in the futures market. If I recall barrick was a flagrant violator some years back. They severely underestimated their costs going forward. They got a doublr whammy. Higher costs and low hedges they had to buy back. This must have been a factor in the rapid price increase in 2003+.

    • So, investors invest billions of dollars just to break even, right

      • Nobody (or rather nobody should be) buying gold to get back more worthless fiat. You buy gold so you have money and wealth after hyperinflation and the deflationary collapse of asset prices. You buy gold not because it is an investment but because it is money. You buy gold because you distrust fiat.

  15. Gail Tverberg’s latest post “The Approaching US Energy-Economic Crisis” talks about how everything within the economy is interconnected and how if one part becomes destabilized it begins to affect other parts of the networked economies. Hence, as she states that we are at the point in time where if oil prices become too high then the average consumer cuts back and if it’s too low then it affects the energy producers such as Venezuela. She makes the case that every time the price of oil hits a certain ceiling the economy begins to slow down.

    https://ourfiniteworld.com/2017/10/18/the-approaching-us-energy-economic-crisis/

    • Rodster,

      Yes, another excellent post by Gail. However, I differ with Gail on the subject of the THERMODYNAMIC OIL COLLAPSE. She checked out The Hills Group analysis a while and said it was bogus. Unfortunately, most people do not grasp the significance of The Hills Group work because they try to over analyze it. I believe Bedford Hill (Hills Group) is correct that the situation in the Global Oil Industry will really start to disintegrate within the next 5-10 years.

      For Saudi Aramco to shelve, their IPO puts out a BIG RED FLAG. Yes, it is true that China might come in and purchase 5% of Saudi Aramco, but they may be doing it for dimes on the Dollar. Also, it is probably being done to benefit both parties. China would get a percentage of the oil, and Saudi Arabia would get much-needed funds to prop up the Foreign Exchange Reserves that are continually decreasing.

      steve

      • AND China may do it with Yuan . .. .. convertible to gold on the Shanghai exchange. Which is better for the long run, dollars or AU ozs?

  16. We should focus on “value” instead of “price”. When goods become more scarce, their value will rise, while its price can be manipulated (like shale oil with cheap debt or physical gold through paper derivatives). We can only afford our current lifestyle by manipulating stocks, currencies, interest and debt. While the physical plane is crashing, the monetary plane turns into a rocket and everyone is looking up in the sky with their mouths wide open.

  17. Hi Steve,

    Another great article. I have a science background. Many people are unaware of the crucial role Gold roles are in many applications (that cannot be replaced with another element) in our modern society. And I am not referring to jewellery or monetary usage.
    Short term gains are more important these days for most human than long term sustainable resource management.

  18. I’m having a hard time getting my mind around all this.
    -Gold’s price is directly related to oil.
    -Laws of supply and demand are not in play with gold.
    -Hills Group says oil price going to tank.
    -But yet gold’s price is forecasted to rise.

    Steve, is there some point when you feel gold’s price will divorce oil and suddenly be responsive to supply and demand forces?

    • My personal response to the above dilemma:

      Gold does indeed operate under the law of supply and demand, but the difference is that gold, so far, has had unlimited demand.

      Food and other necessities are stored but in amounts not in excess of their shelf life depending on their rate of consumption.
      Gold has long term value and very long shelf life.
      We consumers have limited resources so we must allocate those resources, but if we had a printing press, most likely we would gladly trade a small bit of paper and ink for gold.

      It is MHO that the unlimited demand for gold referred to above is the result of actions from those who do have printing press.

      When cost of energy goes up, cost of production goes up, and suppliers demand higher price for product. Printing press consumers are still happy to trade paper and ink for gold at any price. This “unlimited demand” results in an ever shifting supply and demand curve.

      Makes the correlation of cause and effect very deceiving.

      IMHO this will continue so long as the “printed” currency retains it’s assumed value.
      Only when the public realizes the emporer has no clothes will the “gig” be up.
      So says “olegig”

    • Great read. Seems some folks don’t understand “supply AND DEMAND” and limit their views to supply only.

  19. WHY CAN’T THE MINING COMPANIES FIGHT AGAINST THE PAPER MARKET MANIPULATORS? COULD IT BE, THEIR HANDS ARE TIED BY THE BANKS WHO HAVE EXTENDED CREDIT TO THEM TO MINE IN THE FIRST PLACE? THE SAME BANKING FAMILIES THAT CONTROL THE FED RESERVE? THE SAME BANKS THAT WANT TO MAKE SURE THEY CAN CAPTURE ALL THE GOLD MINED? DO YOU THINK THEY MAY HAVE ANYTHING TO DO WITH MINING ‘COSTS’? IE; ENERGY, MACHINERY, ETC? COULD THEY NOT MANIPULATE THE MARKETS UP AND DOWN TO ‘FLUSH’ OUT ALL US INDIVIDUAL INVESTORS? AS WELL AS HEDGE FUNDS OR OTHERS SO THEY CAN BUY IT ALL UP? OH…ALMOST FORGOT…NO ONE TALKS ABOUT THIS… SINCE SILVER IS SO VALUABLE IN ELECTRONICS..IE.. IPHONES, SOLAR ETC DO YOU THINK THAT THE BANKS COULD BE KEEPING THE PRICE DOWN SO THEY CAN MAKE HUGE PROFITS FOR OWNING SHARES IN SAY… ‘APPLE’? AND OHTERS? WHO CARES WHERE THEY MAKE THEIR PROFITS FROM? EITHER OWNING THE PHYSICAL METAL ITSELF OR OWNING THE FINAL PRODUCT?

    LOOKING FORWARD TO YOUR REPLY… 🙂

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