Adrian Douglas: 'Cash cost' hides unprofitability of gold mining


By Adrian Douglas
Sunday, August 23, 2009

There seems to be some confusion about the costs of mining gold.

The industry often talks of the "cash cost" of producing gold. The cash cost is the operational cost of the mine divided by the ounces of production. The definition varies between companies and may include smelting, refining, and any byproduct benefit, but it generally excludes taxes, exploration and depletion expenses, depreciation, and financing.

I think the quoting of "cash costs" by mining companies as an indication of project viability or profits should be outlawed. It is like an investor quoting how much money he has made on an investment without factoring in the brokerage costs, the finance charges for his margin position, and capital gains tax.

Typical "cash costs" for gold are quoted in the range of $350-$500 per ounce. But it is impossible to produce an ounce of gold for the "cash cost," impossible to explore for new reserves, build a mine, and produce metal.

A more useful figure is what it is actually costing mining companies to produce gold.

Four companies -- Newmont, Anglogold Ashanti, Barrick, and Goldfields -- together produce almost a third of all gold, so their production costs may be representative. Taking their revenues from their annual reports and subtracting the reported profits gives each company's total costs. Then dividing by the total annual production of gold ounces gives the total cost per ounce to produce gold, as shown in the table here:

The table shows the aggregate values for the four mining companies for 2006, 2007, and 2008 as well as the average gold price for each year.

What is clear is that over the last three years gold mining by the biggest mining companies has been barely profitable. In fact in 2007 the four companies in the aggregate suffered a loss from mining gold. Look at how from 2006 to 2008 the total costs increased from $13.3 billion to $19.5 billion while production dropped from 25.8 million to 22.8 million ounces.

These four giant companies have gold reserves discovered and developed many years ago and much of their mine development cost has already been depreciated. A small company undertaking to explore for and develop gold reserves could not operate at these cost levels. It is estimated by some in the industry that a gold price of $1,500 per ounce would be necessary for new reserves to be exploited at a profit today.

As mining costs climb, the price of gold must climb at an equal or faster rate for production to continue. But the gold cartel has been preventing that, and as a result world gold production is in rapid decline.


Adrian Douglas is a commodity market analyst, publisher of the Market Force Analysis letter (, and a member of GATA's Board of Directors.

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GoldMiningProductionCosts-08-23-2009.pdf662.16 KB