TOP GOLD PRODUCERS: Yields Falling, No High Grading Yet

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:

High Grading Image

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.

According to Blackrock CIO Evy Hambro (Sept 13th):

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.

Top 5 Gold Production 1H 2012 - 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).

Top 5 Producers Average Yield 1H 2012 - 2013

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.

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18 Comments on "TOP GOLD PRODUCERS: Yields Falling, No High Grading Yet"

  1. does this mean that the cartel will push the prices even lower to force the producer to high-grade?

    i wish all of the producer go bankcrupt and shut down, so the prices of gold/silver can really take off!

    • My price targets for gold and silver in 2014 are $0 and -$100 respectively…

      • Adolf… interesting targets. How did you come up with those figures.


        • The Cartel can do anything they want on the Comex. A flash crash to $0 and -$100 is just a piece of cake for them. If they become desperate, they will try anything…

          • “The Cartel can do anything they want on the Comex. A flash crash to $0 and -$100 is just a piece of cake for them”.

            No, they can’t do that. If you think so you know very little about commodities futures; short and long positions. The biggest player in the market is JPM and they have gone massively long on gold, and recently are reducing their short positions in silver. They would have to willingly decide to lose hundreds of millions to allow significant decreases from this point, and that won’t happen.

  2. Investors should focus on the stats of individual mines and not the aggregate stats. Barrick, for example, has 5 miners which make up 60% of production with all in sustaining costs of $700. High grading it is just a side issue. At $1300 gold, high cost mines will eventually be shutdown and worldwide global production will drop significantly. This info is readily available in Barrick mine stats referenced below. Even if gold prices increased appreciably, recycling of gold will not offset production cutbacks. In fact, the wgc data shows that recycling tonnage actually dropped as gold prices increased over an extended period of time. Probably due to western central banks running short on gold to lease to the bullion guys. Confusing but that’s what you get when western central banks and bullion banks conceal the truth to “regulate” the price of gold. 13-Q2.pdf

    • Norm… it doesn’t really matter if Barrick has 5 mines that make up 60% of its production. What matters is their total production. Furthermore, Barrick’s North American operations did increase their grade from 0.067 oz/t 1H 2012 to 0.070 oz/t in 1H 2013. Basically, they increased their average ore grade at two regions while it decreased at the other two.

      I am just making the point that “High Grading” will not be a big issue as many have stated in the press. Ore grades & yields continue to decline in the top gold miners which means higher costs and less gold unless they add new mines or process more ore.

      The top 5 gold producers average yield declined from 1.68 g/t in 2005 to only 1.22 g/t in 2012. Thats a 27% decline in 7 years. Thus, this group lost 0.46 g/t forever. Sure, we might see a temporary blip up, but the trend is down.

      The problem with the analysts of the world today is that they don’t focus on AGGREGATE DATA as much as they should. You can see the world from a totally different perspective when see it from say a birds eye view. This is also the same problem in the energy industry.

      By the way, your link doesn’t work.


  3. Historically, abx let production drive roe. The new ceo, Jamie Sokalsky, last year changed that – roe drives production. As a result, abx production will be down this year – credit suisse says they’ll produce about 6.5 million ozs – probably down 10% annualized excluding the disposition of 3 australia mines.

    Ok to have different opinions.

    • Norm… yes, different opinions are always a good thing. Again, the main point I was making in the article was that “High Grading” will not make much of a difference as the analysts have stated. I don’t think overall production will increase, rather it will probably decrease due to the very reason you stated in your comment above.

      Also, unless they have changed their forecast from their Q2 report, production for 2013 will more than likely be 7-7.2 million oz.

      I see the top gold miners cutting back on projects and Capex while shutting down their marginal mines, instead of high grading.


  4. Steve – The 6.5 million ozs. is forecasted for 2014. Here are Credit Suisse Notes from the Denver Gold Conference:

    Notes from the Denver Gold Forum
    ■ ABX presented at the Denver Gold Forum: On Sept. 24, 2013, Jamie Sokalsky, CEO of ABX provided an update on the company’s activities.
    ■ Key priorities for ABX in 2013 were to (i) focus on cost reduction; (ii) deliver operational excellence; (iii) maximize cash flow; (iv) strengthen the balance sheet; and (v) strength corporate responsibility.
    ■ Barrick’s case for investment: (i) high quality asset base; (ii) lowest cost senior producer; and (iii) disciplined capital allocation. ABX continues to improve and optimize its portfolio, looking to cull higher cost mines and seek operational improvements at all its mines, rather than raising cut off grades. ABX is transforming into a more agile, leaner and profitable company.
    ■ Mine plans completed at $1,100/oz: Which provides a built in margin for ABX to generate positive cash flows from its mine plans. ABX indicated that a lower gold price would impact reserves at year end and production levels, but would provide higher quality ounces. We expect ABX to use a $1,300/oz gold price for reserves.
    ■ Production for 2014, ABX looking to improve lower cost assets as well as high cost: Current CS estimate is for a reduction in production to a sustaining ~6.5Moz level, reflecting the loss of 0.3Moz from Yilgarn South, as well as ABX’s focus on quality over quantity of production. ABX stated its cost reduction measures may mean lower production for ABX. We also expect ABX will be able to create value from some of the other Australian assets (Kanowna and Plutonic).
    ■ Pueblo Viejo update: PV will likely hit the lower end of the production guidance range this year, reflecting a 6-9 month longer ramp than originally forecast as the plant is de-bottlenecked. The SLA taxation agreement was signed along the same economic terms as previously announced in May.

  5. Gold is the “gold standard” of historical money; the choice of kings, nations, central banks, and sovereign entities. It is highly coveted. Due to the things Steve mentions physical shortages will catalyze gold priced in fiat currencies to soar, and it won’t take until the end of the decade.

    I suspect a similar or analogous mining and cost-effectiveness scenario exists with silver. But it has thousands of uses that run our world, like modern electronics that control and run everything. Gold has relatively few essential uses. We can live without gold but not without silver. Silver will face the double squeeze of investor and industrial demand.

    If I had a million dollars to spend on gold and/or silver right now, it would be hard for me to buy any gold at a 61 to 1 price ratio.

  6. steve,
    since the IT/semiconductor revolution, how much gold has been consumed in tech applications?

    something like 10000 tons gold in gadgets and computers and other electronics?

    that’s big number, considering china’s total gold holdings still less than 10000 tons!

    the cartel is forcing the bank of india to loot gold in the temples and offer fractional reserve gold deposit schemes to indian citizens. the cartel has found an easier source of physical gold!

    originally, i thought when gold soar to 3000-5000 dollars per ounces, gold will become out of reach for the indians and india may become a net seller of gold.

    • “since the IT/semiconductor revolution, how much gold has been consumed in tech applications?

      something like 10000 tons gold in gadgets and computers and other electronics?”

      Where do you get those figures from?? Since silver is a better conductor than gold at a fraction of the price, why would gold be used except in very few special applications?

      • every year, 200 tons of gold is consumed in industrial applications every year. every smart phone has some gold in it. every cpu has some gold in it. indians eat gold too! i bet every cruise missile has some gold on its computer chip too. tiny amounts do add up!

        so i guess 10000 tons of gold is gone forever in the past 50 years!

  7. inflation is already running wild. beef price in china’s major cities are making all time highs, more than 12 dollars per kilo. i’m not talking about premium australian beef but china’s domestic beef!

    this is definitely more expensive than beef in the US.

  8. Hi Steve,
    Top site,thx. Just wondering.Are the Chinese owned au mines providing figures for all the production heading straight back home via perth mint etc?

    • yuam abet… actually I don’t know of any data that shows that. However, it is understood that almost all gold produced in China stays in China.

      The one thing that many people are not paying attention to is China’s gold reserves in the ground. According to the USGS, China has 1,900 metric tonnes of reserves and they are producing about 360-370 tonnes a year. This is little more than a 5 year supply.

      Of course they can prove up more reserves but Jim Rickards stated a few years ago that the Chinese were mining gold as fast as they could and would probably run out of gold to mine within 10 years. As I said, they could still find more gold in the ground, but I would imagine their production will decline substantially in the next 3-5 years.

      For sake of comparison, the U.S. has 3,000 tones of reserves and an annual production of about 230 tonnes. Australia has reserves of 7,400 tonnes with annual production of 250 tonnes.


  9. Interesting data on shanghai gold exchange deliveries 7/13 ytd:

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