Overview of Mining Costs 24 August 2012 Rohit Savant 30 Broad Street, 37 th Floor Senior Commodity Analyst New York, NY 10004 rsavant@cpmgroup.com www.cpmgroup.com
Outline 1. Factors Influencing Cash Costs 2. Major Cost Components 3. South African Gold Mining 4. Metals Prices and Costs 5. Costs and Mine Supply
Primary Factors Influencing Cash Costs Primary Factors Influencing Cash Costs
Two Distinct Set of Factors Drive Mining Cash Costs: � The first set of factors relates to the actual costs of inputs : Skilled labor, mining materials, equipment, reagents, structural steel, and everything else that goes into running a mine. � The second set of factors relate to the price of the underlying metal of the mine. the mine. higher metal prices encourage mining lower grade properties driving • higher the cash cost curve the price of the metal also influences input costs •
Other Factors Influencing Cash Costs Other Factors Influencing Cash Costs
Deep-Level Mining Boosts Cash Costs � This type of mining inherently pushes higher the mining cash costs because Of the need for more skilled labor (to deal with increased • complexities associated with such mining) Intricate infrastructure • Increased electricity costs (for cooling deep underground shafts) Increased electricity costs (for cooling deep underground shafts) • Overall increase in overhead and maintenance costs • � In the case of some metals, like platinum, depth of mining is rising as metal available at shallow levels has for the most part already been extracted.
Reduced Production Raises Cash Costs � There is an inverse relation between the level of production and the per ounce cash cost. � Higher production helps reduce the fixed cost components. � Lower production can result from: Safety related production stoppages • Technical problems • Lower grades •
However… � Most cash cost components are variable costs. � As a result of this, the rate at which these costs rise (input cost inflation) plays an important role in influencing the overall cash costs
Input Costs Input Costs
Labor Costs are the Largest Mining Cash Cost Component Typical Gold Mining Cash Cost Breakdown Other Typical Gold Mining Cash Cost Breakdown Consumables Component Component Range Range Typical Typical Labor 30% - 55% 50% Parts and Labor Supplies Fuel 8% - 10% 9% Utilities 8% - 11% 10% Parts & Supplies 8% - 15% 12% Utilities Consumable 14% - 23% 7% Other 7% - 15% 12% Fuel 100%
South African Gold Mining Cash Costs South African Gold Mining Cash Costs
Wages Have Been Rising Faster than the Benchmark Wage Inflation: Benchmark and Premium/Discount of Actual Wage Increase to Benchmark � The benchmark is Percent Percent 16 16 inflation plus two Premium/Discount to Benchmark 14 14 Benchmark percent. 12 12 10 10 � 8 8 Premium/Discount is 6 6 the difference between 4 4 the actual average the actual average 2 2 wage inflation less the 0 0 benchmark. -2 -2 -4 -4 -6 -6 01 02 03 04 05 06 07 08 09 10 11 12
Sharp Increases in South African Electricity Tariffs Annual Increases in Eskom's Electricity Tariff Rates Percent Percent 35 35 Eskom's Annual Electricity Increases 30 30 25 25 20 20 15 15 10 10 5 5 0 0 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12p
Methodology to Calculate Input Cost Inflation � Determine the inflation of each component. � This inflation then needs to be weighted by the weighting of that component in the cash cost breakdown. � The sum of the above then needs to be weighted by production at Mine level • Country level •
Price of Underlying Metal Price of Underlying Metal
Gold: Near a Cyclical Peak in a Secular Bull Market Quarterly Average Gold Price, Forecast through 2013 Gold prices are S/Ounce S/Ounce expected to remain 2,000 2,000 high by historical Forecast (2014 - 2021) 1,800 1,800 standards, going Average Price of Gold: $,1684 forward. 1,600 1,600 1,400 1,400 1,200 1,200 1,200 1,200 1,000 1,000 Historical (2002 - Q2 2012) Average Price of Gold: $790 Historical Long- 800 800 Term Average Price of Gold: $403 600 600 400 400 200 200 0 0 68 73 78 83 88 93 98 03 08 13
Investment Demand • Investors have been purchasing gold for a variety of reasons over the past decade. Just some of these reasons are: - increased concerns regarding major reserve currencies - two recessions in the past decade (2001, 2007-2009) - negative real interest rates - concerns of inflation - poor management of issues related to trade, debt, and deficit imbalances - poor management of issues related to trade, debt, and deficit imbalances • These problems are real and some are expected to take several years to be resolved . • Investors are expected to continue adding to their holdings in historically large volumes! • They are not , however, expected to chase gold prices higher as was seen during the past few years. Instead investors are expected to add to their holding on prices declines . • This is expected to both weigh on gold investment demand and the price of gold.
Inverse Relation between Gold Price and Gold Grades $/Ounce Grams/Metric Tons 14 1400 Grade Gold Price (RHS) 12 1200 10 1000 8 8 800 800 6 600 4 400 2 200 0 0 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
Gold Mining Has Become Extremely Profitable Again The Price of Gold and Cash Operating Costs of Production Margin between Gold Price and Total Production Costs and Cash Cost Quarterly, Through Fourth Quarter 2011 Quarterly, Through Fourth Quarter 2011 $/Ounce $/Ounce $/Ounce $/Ounce 1,800 1,800 1,000 1,000 Gold Price 900 900 1,600 1,600 CAGR: 20% 800 800 1,400 1,400 700 700 700 700 1,200 1,200 Gold Price minus Total Cost 600 600 Gold Price minus Cash Cost 1,000 1,000 500 500 Production Cost 800 800 CAGR: 400 400 13% 600 600 300 300 Cash Cost 400 400 200 200 CAGR: 14% 200 200 100 100 0 0 0 0 02 03 04 05 06 07 08 09 10 11 02 03 04 05 06 07 08 09 10 11
Gold Mining Cash Profit Margins in the 1980 and 1990s Margin between Gold Price and Cash Cost The Price of Gold and Cash Operating Costs of Production Annual, Through 2011 Annual Data, Through 2011 $/Ounce $/Ounce $/Ounce $/Ounce 1,000 1,000 1,600 1,600 900 900 1,400 1,400 800 800 1,200 1,200 700 700 Gold 1,000 1,000 600 600 500 500 800 800 400 400 600 600 300 300 400 400 200 200 Cash Costs 200 200 100 100 0 0 0 0 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
Cash Costs and Mine Supply Cash Costs and Mine Supply
Most Gold Production Is Profitable Below $1,000 Gold Mine Cash Costs in 2011 90% of global gold production Cash Cost /Ounce Cash Cost /Ounce $2,400 $2,400 from primary gold mines was produced at cash costs lower $2,200 $2,200 than $1,033 per ounce during $2,000 $2,000 the third quarter of 2011. $1,800 $1,800 Annual Average Gold Price in 2011 = $1,569 $1,600 $1,600 The flatness of the gold cash $1,400 $1,400 cost curve makes gold production relatively less $1,200 $1,200 sensitive to changes in the $1,000 $1,000 price of the metal. $800 $800 Weighted Average Cash Cost = $621 $600 $600 $400 $400 $200 $200 $0 $0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Cash Costs and Mine Production Gold Mine Production and the Margin between the Gold Price and Cash Costs There is a lag effect Million Ounce $/Ounce between the margin 1,000 80 between cash costs and 900 72 Margin prices and the 800 64 Mine Production (RHS) increase/decrease in 700 56 supply 600 48 500 40 400 32 300 24 200 16 100 8 0 0 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
Gold Mine Production Forecast to Rise Estimated Annual Gold Mine Production Capacity Gross Additions Mln. Oz. Mln. Oz. 35 35 Post 2015 30 30 2015 25 25 2014 20 20 20 20 2013 15 15 2012 10 10 2011 5 5 0 0 2011 2012 2013 2014 2015 Post 2015 Note: Post 2015 data refers to 2016 through 2021.
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Thank You Rohit Savant Senior Commodity Analyst CPM Group 1-212-785-8320 rsavant@cpmgroup.com www.cpmgroup.com
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