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Gold Mining Production Costs

High Production Costs May Buoy Gold Prices for Decades

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Even at $1,200 an ounce, gold is still one of the safest investments you can make.

That's because, unlike 99.9% of other investment vehicles, gold has an intrinsic and universal value that has supported a strong market price throughout human history.

And now we have even more reason to remain confident in gold as a safe investment, thanks to a surge in mining production costs that may help buoy gold prices for decades to come. It all starts with the...

Rising Production Costs of Gold

Mining for gold is often romanticized as an adventurous, sometimes dangerous, way to add to your income. But as a business, it's very difficult to make a profit. And the real danger is financial.

Gold production is a very energy- and labor-intensive process, making it very expensive to operate a gold mine... especially now. Over the past few years, rising energy and labor prices have forced global gold production costs to increase quite dramatically.

In 2000, Barrick Gold (NYSE: ABX) was producing gold for $145 an ounce (inflation adjusted = $185/oz). During the first three quarters of 2009, the company's total cash cost were $463 an ounce — a 215% increase.

According to GFMS, a world authority on gold markets, Barrick's current production costs are about average. Data from GFMS shows world gold production costs for the first half of 2009 averaged $457/oz. This average cost is down from $623/ounce in the third quarter of 2008.

Gold production costs swelled over 150% in five years between 2003 and 2008. And due to recent increases in energy and labor prices in the second half of 2009, experts estimate global gold production costs may average up to $500 an ounce for the year. Take a look:

200911_global_gold_production_costs.png

In the long-run, the average gold production cost must increase.

The most easily accessible and cheapest gold resources will always be developed and exploited first. As these resources are diminished, producers will be forced to develop the next cheapest gold resources in line.

The ever-increasing nature of the cost of production may help support a growing valuation floor above $500 for gold prices. And it's one of the reasons that I think...

Gold Has the Best Worst-Case Scenario

The price of gold should always find price support near the average global cost of mine production.

That's because if the cost of production significantly exceeds the value of the yield, operators will likely halt output until market conditions improve. It's simply a matter of economics.

This halt will decrease the total supply of new mine production. And this decrease may ultimately help buoy gold prices to varying degrees depending on demand.

So if the average global cost to produce gold is $500 an ounce, I think gold's ultimate valuation floor may be near that level.

Conclusion

Indeed, a near 60% decline to $500 could be considered the worst-case scenario for gold. However, the worst-case scenario for currency-denominated asset classes like stocks and bonds is a 100% decline. So gold is still one of the safest assets to own.

Aside from being the safest investment, I also believe gold will be one of the easiest ways to profit over the next 12 to 24 months. The bottom line: I don't believe that we've seen the biggest moves this gold bull market has to offer. And the time for gold to build up a head of steam and tackle is inflation-adjusted high of $2,500 has never been better.

In order to leverage gold's huge investment upside potential for members of my Hard Money Millionaire advisory service, I am currently building a brand-new portfolio of junior mining stocks. So far, I've recommended three stocks in the portfolio (with a fourth to be added sometime next week), but have already done quite well. In fact, you can take a peek at my junior mining portfolio just by clicking here.

If you're also interested in gold stocks, you might want to check out these...

Three Low-Cost Gold Producing Stocks

In doing research for this article, I learned gold production costs currently average about $450 an ounce for companies, including Agnico-Eagle (NYSE: AEM) and Newmont Mining (NYSE: NEM).

As I looked through the financial statements of the individual companies, I noted those with the lowest gold production costs. Below I've list the three companies with low-cost gold production within the three major financial classes.

Goldcorp (NYSE: GG)

200911_goldcorp_gold_production_cost.png

 Financial Class:
Senior Gold Producer
 Share Price:
$44.50
 Market Cap:
$32.5 billion
 3Q Gold Production: 620,000 ounces
 3Q Gold Production Costs:
$295/oz.
 2009 Gold Production Guidance: 2.3 million ounces
 2009 Gold Production Costs Guidance: $365/oz.
 
Goldcorp is one of the largest gold mining companies in the world. With 14 operations and development projects, Goldcorp expects to produce 2.3 million ounces this year at a total cash cost of $365 an ounce. During the third quarter of 2009, the company produced over 620,000 ounces for total cash cost of $295 an ounce.

Eldorado Gold (NYSE: EGO)

200911_elderado_gold_production_costs.png

 Financial Class:
Mid-Tier Gold Producer
 Share Price:
$13.75
 Market Cap:
$5.5 billion
 3Q Gold Production: 89,000
 3Q Gold Production Costs:
$297/oz.
 2009 Gold Production Guidance: 550,000
 2009 Gold Production Costs Guidance: $340/oz.
 
Eldorado Gold is a mid-tier gold producer active in exploration and development in Brazil, China, Greece, Turkey, and surrounding regions. The company plans to produce a total of about 550,000 ounces of gold this year at a total cash cost of $340 an ounce. During the third quarter, Eldorado produced 89,000 ounces at $297 an ounce.

Minera Andes (TSX: MAI)

200911_minera_andes_gold_production_costs.png

 Financial Class:
Small-Cap Gold Producer
 Share Price:
$0.75
 Market Cap:
$200 million
 3Q Gold Production: 22,000 ounces
 3Q Gold Production Costs:
$313/oz.
 2009 Gold Production Guidance: undisclosed
 2009 Gold Production Costs Guidance: undisclosed
 
Minera Andes is a small but successful gold and silver miner. The company producers almost an equal amount of gold and silver by value, but is worth mentioning here because it is currently one of the lowest-cost small-cap gold producers around.
 
Minera will produce over 75,000 ounces of gold this year at an estimated $330 an ounce, although there is no official guidance. During the third quarter, the company produced 22,000 ounces of gold at $313 an ounce.

Enjoy the rest of your holiday,

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Luke Burgess
Editor, Wealth Daily
Investment Director, Hard Money Millionaire

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