| LONDON/TORONTO, June 27
LONDON/TORONTO, June 27 The gold industry has
released new guidelines for bullion miners under pressure to
disclose the real economics of producing an ounce of metal,
feeding a debate over the sustainability of many gold mines in a
sector battered by falling prices.
Miners have seen gold prices soar since the turn of the
millennium. At their height in 2011, prices were more than six
times the level a decade earlier.
But costs like wages, taxes and electricity have all
climbed, sometimes faster than the gold price.
The effect has been that a price drop since April - the
sharpest in a generation - has pushed many mines into the red
and miners to the verge of reserve writedowns.
The World Gold Council said its new guidelines would help
clarify the real cost, beyond cash costs which account for only
a portion of what goes into producing an ounce.
"The signal (the new cost reporting will send) is that the
gold industry is probably not sustainable at its current level
of output," Nick Holland, chief executive of Gold Fields, said.
"We are going to see more projects deferred, possibly
marginal mines being put on care and maintenance or just shut
altogether prematurely. And that's going to change the whole
supply and demand fundamentals for the gold industry."
Gold equities have been battered as prices fall, with the
Thomson Reuters Global Gold Index down almost 50 percent so far
this year - in part, investors say, due to opaque costs.
"Investors cannot understand the cost structure, so they
move out of the sector, rather than take a risk," said fund
manager Angelos Damaskos of Junior Gold.
Methods used by gold companies to report the cost of
production often lack consistency.
Most use "cash costs", based on a standard developed by the
now defunct Gold Institute, but with significant variations -
like whether or not to include credits for by-products, certain
taxes, capital costs and other items.
Top producer Barrick Gold Corp, for example, has
historically reported total cash costs and net cash costs, while
the world's second largest producer, Newmont Mining Corp
, reported costs applicable to sales.
The metrics can include a credit for some by-products, but
In its guidelines, the World Gold Council listed elements to
be included in two measures - "all-in sustaining costs", or the
effective day-to-day cost, and "all-in costs", which adds in
extra costs to reflect variations over the lifecycle of a mine.
Companies are not obliged to use the metrics - which exist
on top of normal accounting standards - but many producers have
already adopted very similar measures and more are likely to
follow suit, driven by pressure from investors like BlackRock
who say miners need to report more accurately.
"What we want to do with this methodology is lay out an
approach that we hope will provide greater consistency," said
Terry Heymann, director for responsible gold at the WGC.
"All-in sustaining" costs including everything from mining
costs to royalties, permitting and exploration to sustain
production. "All-in" costs add in elements like broader
community and permitting costs.
Part of the issue for gold producers in recent years has
been the disconnect between a record prices and lacklustre share
While costs rose across the wider mining industry, gold
miners were hit harder, in part as average grades fell.
Average grades in 2002 of 2.8 grammes per tonne had tumbled
to 1.2 g/t in 2011, meaning that for every tonne of rock moved,
the amount of gold contained within has more than halved.
With most rich projects in traditional mining districts
gone, miners were also pushed to expand capacity into
lower-grade deposits and tougher geographies just to keep
production flat, which was fine so long as gold prices kept
But as gold prices tapered off, many new projects started to
look very marginal.
That has left major gold miners in a bind, with their true
cost of production hovering around $1,100 to $1,200 an ounce and
sometimes higher - uncomfortably close to the spot price, which
plunged to a 3-year low at $1,221 on Wednesday.
"With a rising gold price, you can cover up a lot of sins,"
said Graham Shuttleworth, chief financial officer of FTSE 100
miner Randgold, which has outperformed rivals.
Shuttleworth, like many peers, said measuring return on
investment was paramount in his own decision-making - not costs
alone - but recognised investor demand for more.
"From an investor point of view I can see this is better
than nothing. I am just cautioning that on its own it is not a
magic solution...I would caution that to try and simplify it
down to one measure and think this will solve the industry's
problems is a little naïve."
The World Gold Council hopes the measures will help, for
example, with negotiations with governments which have assumed
modest cash costs and a high prices mean huge profits.
But, as Shuttleworth and others have said, even better cost
measures are not a panacea. Companies can bring down headline
costs by cutting exploration, for example - with consequences.
"That's not really lowering costs, that's just spending
less," said analyst Elizabeth Collins at Morningstar. "It just
means future production will ultimately suffer."