The Soft Cost Curves Of Hard Assets: Where The Cash Flow Hits The Road

Tyler Durden's picture

Given the dramatic drops in gold and oil prices over the past few trading sessions, we thought it worth examining which miners and oil producers were most 'at risk' of generating negative cash flows at current and long-term prices. Goldman Sachs looks at 40 oil producers and 25 gold mines to create a complete 'cost curve' in terms of the best indication of what it actually costs to keep operations running. It is quite apparent that ~$85 Crude and ~$1150 Gold are key to the ongoing support for these industries.

Via Goldman Sachs,

Gold Cost Curve

We have ranked all 25 gold mines under our coverage on a gross cash cost basis – which includes all mining, processing and royalty costs as well our most recent estimate (in some cases reported) of additional costs such as deferred waste movement and sustaining capital. We look at these costs as the best indication of what it actually costs to keep operations running.

Of course, some particular assets are undergoing periods of particularly high capital expenditure (for example, Mt Rawdon), however by its very nature we assume this expenditure would be difficult to stop and also maintain existing mine life and production expectations. We also flag that cash costs do not often include a recharge for corporate overheads or exploration – which must surely come under scrutiny given the extreme decline in price.

We list the mines from the lowest cost operation to the highest, creating a cost curve. Typically companies with by-product credits, such as Cadia (run by Newcrest) rank lowest on the cost curve. In addition, higher grade operations also generally produce lower cash costs (and generally by extension the best margins).

The companies least at risk of generating negative cash returns at their operations are Regis, OceanaGold and Medusa (all Buy-rated stocks), whereas at the upper end of the curve are St Barbara’s two Pacific assets as well as Newcrest’s Hidden Valley and Bonikro mines.


2012 Costs


2015 (estimated costs)


Oil Cost Curve

Rising prices at the pump in recent years reflect a very real dynamic for oil producers: crude oil is becoming more capital intensive to extract and is coming from ever-more improbable sources. Until the successful development of liquids-rich shale in the US it was thought that the panacea for rising crude oil demand lay in the Canadian oil sands, a vast tract of bitumen reserves in Alberta, recovered either by intensive strip mining or by injecting steam into the ground to soften and release the oil. The drawback was that both processes required enormous capital outlay, such that the most marginal of the projects needed oil prices upwards of US$120/bl to make economic sense. As a result, the world could either get used to paying more for its crude oil, or figure out who would go without.



In the event, this argument was curtailed by the financial crisis, and we saw only a few months of demand-rationing oil price levels in 2008 before other factors took over. The correction of the oil price first down to the marginal cash cost of production of c.US$35/bl (at which point some oil sands production was physically shut down) and subsequently back up to US$100/bl+ reflects the fact that the fully-loaded cost of oil production, including capex, opex, transport tariffs, and a commercial return, remains high in historical terms, and that capital intensity has played a major part in the shift.

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nope-1004's picture

From RK:


I respectfully suggest you guys consider the following:
A piece written by Russell Rhoads, CFA of the CBOE Option Institute - wrote the following:"'Friday was a 4.88 standard deviation move in the price of gold. For simplicity's sake let's call it a five standard deviation move. Statistically we get a five standard deviation move approximately once every 4,776 years. So we should not expect another move like this out of the price of gold until May 17, 6789. ...Currently the two-day price change in GLD is 16.65, which can be converted to just over eight standard deviations. I wanted to share what this comes to, but the table I use only goes up to seven standard deviations. Let's just say the sun is expected to burn out first.'"

Personally, I checked with Dr. Jim Willie [Phd., Statistics, Carnegie Mellon]. He told me the odds of a 7 Std. Dev. Move are 1 in 781 Billion. He went on to add, "there IS NO MATH to calculate the odds of 8+ Std. Deviation moves".


Rob Kirby

css1971's picture

The assumption being that the movement is random. Clearly not the case, so the stats being used are being applied inappropriately.

toys for tits's picture

Aren't the stats confirmation of the manipulation?

JustObserving's picture

Yes, stats say that 99.9999% it was manipulation - you can safely bet your life it was manipulation and not a random event.

toys for tits's picture

Can we all get on board to attempt our own market manipulation of the silver market on May 1.

High production value video that has Tyler in it.

EL INDIO's picture

've already started.

I've stopped buying Gold some time ago and been mainly buying Silver.

I'm now swapping Gold for Silver.

(All physical of course)


EL INDIO's picture

I  watched the video.

I think it should have been launched sooner.

However, I think it is game over for the fraudsters. When a huge drop like this one creates a rush to buy instead of a panic to sell, you know it’s GAME OVER.

DeadFred's picture

Sigma is a useful concept for comparison but the tails on the distributions are very fat. You can see the assumption of normal distribution in the structure of derivatives. How much money would you have made if you put on a strangle position on GLD on Thursday as gold price approached support. Learn the lesson and you may wish to take some small speculative positions when the S&P drops to support. This is a brittle market and the risks are not priced in. That included gold but it very certainly includes the manipulated stock market. Everyone has adopted BTFD as their mantra and when it finally doesn't work there will a very rude shock for a lot of momos.

Manthong's picture

4.88 Smegma price move?

Something about this whole thing doesn't pass the smell test.

Variance Doc's picture

First, it is not clear if the empirical distribution has been normalized or not.  That is important for comparisons, e.g. apples to apples.  Second, there is NO such thing as "Sigma...concepts" in the professional probability and statistics literature.  There IS a concept of a Z score, which DOES NOT depend on normality.  It is a unitless measure and when used with respect to a normalized distribution (note I did NOT state a normal or Gaussian distribution - it works with other distributions as well, e.g. Chi-squared, etc.), will tell you how far away an event is from a mean of zero.  It is another way (same concept, different way of looking at it) you can gage the probability of event happening.


EL INDIO's picture

That’s right, they assume a Gaussian distribution which is fine for many NATURAL phenomenons but not leveraged electronic markets with stop loss orders. Can’t model this shit.

Variance Doc's picture

Central Limit Theorem.  Historically, these standard devations are correct.

EL INDIO's picture






Is pretty new to history.

Variance Doc's picture

LOL.  Fraud and manipulation is "pretty new to history"?  You really are clueless.

EL INDIO's picture

This is not any fraud, this is coordinated fraud at the highest levels,  a planetary wide fraud executed effortlessly with a few keystrokes or a dumb computer program.

This is new,  ma man.

Variance Doc's picture

Wrong.  It has nothing to do with randomness.  They are simply locating an event on the historical (empirical) distribution and asking "what is the probability of seeing the event in question"; a perfectly VALID use of probability and statistics.

It really amazes me that some people can be semi-fiancially literate, but completely ignorant of the tools used, e.g. probability and statistics.

whatsinaname's picture

My guess is the miners will do alright inspite of physical price drop. The surge in demand albeit at lower prices should make up for it.

On the other hand wonder how Kyle Bass's buy gold in Yen is doing ? Probably beaten up for now.

unwashedmass's picture

i would venture that the timing of Goldman's stunning analysis is done just in time with the horrendous sentiment.....and all their clients will be encourage, indeed happy, to sell all their mining shares to Papa Lloyd. 

Arius's picture

well, someone has to provide liquidity ... for the market to work

augustusgloop's picture

funny that no one is screaming sell CVX for the past 2 years  as oil drifts close to below 100.

eclectic syncretist's picture

In other words it was clearly due to an overwhelming outside force, meaning manipulation.

andrewp111's picture

If the distribution is not Gaussian, your assumptions of how often large moves occur is dead wrong. We know from experience that markets do NOT follow Gaussian distributions.

ParkAveFlasher's picture

Moral of the story: don't fuck with Jim Willie'S math.  IT'S THAT FUCKIN SIMPLE.

Diogenes's picture

It's one of those once in a lifetime deals that only happens once or twice a year.


The financial markets get the equivalent of a "100 year storm" every 10 years. This isn't one. This gold beat down will be forgotten by the markets in a year or 2, most people outside the markets  are not aware it even happened.

Kiss My Icelandic Ass's picture

A little off topic, but the Market Ticker just posted a real eye-opener audio/video of economist Jeffrey Sachs's scathing take on Wall Street and the political system:

waviator's picture

Dr Sachs nailed that one! Like most macro economists, he is a collectivist. But he and Lawrence Lessig of Harvard, another liberal, are doing their share to point out the corruption that is Wall St and Washington, and both have named President Obama for his failure to act. A glimmer of hope?
Thanks for the link.

scatterbrains's picture

Great link!  To this day sometimes I wonder (even though the corruption has been building for years) That at the moment Clinton had that young jew girl suck his dick on the great seal of the united states that the money changers drew their monetary daggers and accelerated the destruction of the banking system in the U.S.


disabledvet's picture

Who's their banker you Goldmanite dipshits. You people really are just about worthless.

Confundido's picture

Miners should collude to create their own metals exchange and accept bank loans/m&a advisory/capital markets business only if their respective bullion banks recognize the new exchange. For all transactions, the price to benchmark should be the one of their exchange. Their exchange should have no leverage and offer immediate delivery. If the miners don't go for this, then they fucking deserve everything coming their way.

Kirk2NCC1701's picture

[Sing to Carly Simon's song Anticipation]:

Con so li da tion.... is making us rich.

yogibear's picture

Keep blowing bigger and bigger bubbles Fed banksters.

Bernanke, Evans, Dudley and Yellen,

you notice how larger and larger QE amounts have a decreasing stimulus effect?

Eventually you kill the economy. The debt junkie is about overdosed.


Spitzer's picture


Fundamentals ????? Lol..

Why not apply some fundamentals to the 33 year bond bubble Gold-man ?

cowdiddly's picture

Notice the oil listed as companies but the gold listed as individual mines. I guess they have not heard about the landslide at Kennicot or Pascua Lama being shut down with billions in losses. Looks like typical Goldman muppet food to me.

toys for tits's picture


They also didn't include the replacement cost of ore to sustain a company.

A better cost analysis is found here, IMO:

cowdiddly's picture

or half of African mines in decline and the other half with labor problems due to paying less than a living wage and deplorable working conditions. Or the fact that most companies are shelving exploratory projects.

But I know it only costs 5 dollars to dig out of the ground. Goldmans trying to get some cheap gold from the suckers, Don't sell these criminals a freaking ounce.

Heck I can't even recover my own stack after the boating incident for the breakeven prices they are quoting. Cost skyrocket when salvage diving operations are involved.

Cacete de Ouro's picture

Gold mining executives had assumed higher than current prices for gold this year. These prices are used in a whole host of projections and costings etc.

See the PWC Survey here:

worth reading the first few pages.

So now the mining execs have been screwed over by wall street, will they stand up for themselves?
Not likely based on their track record, but stranger things have happened...

e-recep's picture

but i dont want to register just to read this...

gwar5's picture

About time for markets to realization that each successive diminished response to QE means things are doomed to fade and collapse just as if the FED announced outright they were going to cut back or pull the plug on further QE.  He who panics first doesn't get burned alive.

toys for tits's picture

Apparently all you're looking for is the clicks for this bullshit article, so here it is in its entirety so no one has to click now.


A Tip For Investors.

Roman Pearce

April 18, 2013

In the capitalist system we all have to look out for ourselves. So here is a

tip for anyone with stocks, bonds, real estate, whatever, outside Japan, that is

chasing money.

Japan has the new global reserve currency. Instead of dollars, people are

going to start trading everything in Yen: gold, oil, food, everything.

This will give all Japanese companies a massive competitive advantage. It

has already started and it will only grow in the future!

For a long time, probably 10 years, it will not go down for you and you

should buy nonstop.

And right now and they are on sale at the best possible price!

There is a big bull market starting in Japan. That is mathematically certain.

And if you need to make a return on your capital then you need to buy Japanese

equities, and the sooner you do this higher your return!

Every market around the world outside of Japan: stocks, bonds, real estate,

commodities, everything, is in a bear market, so if you are an investor you need

Japanese stocks!

That is mathematically the only bull market for the rest of the entire world.

Everything else is in a bear market, including the US dollar, so if you need

to make money you know what to do.

The Yen is in a bull market too. The best possible investment in the entire

world and the only one that will make money instead of lose money is the

Japanese stock indices. TOPIX and NIKKEI.

Buy them now the sooner you do this the higher your return!

Forget about every other market in the entire world. They're all going down.

The only place to be is Japan!

Victorio's picture

Holy shit.  

There doesn't seem to be much of a correlation between mathematical abilities and intelligence, wisdom, or insight.

I'm gobsmacked.

Did you get paid to write that?



swissaustrian's picture

What they're leaving out of their analysis is that gold mining costs have been rising every year for 5 years. So assuming that costs are going to be stable in the long term is simply stupid.

the grateful unemployed's picture

1) deflation crash 2) value of gold goes to zero 3) people still want gold (more than ever actually) 4) price of mining the gold goes to $2000 an ounce. 5) add cost of mining gold to the intrinsic value and you have the (minimum) price at which gold will sell

lotusblue's picture

$85 crude is way over prod costs for %90 world supply.The thing is the LEVERAGE

of crude in the market place and additionally,by supply Soverigns ! They've lervered

crude like gold has been leverred with all the same incumbant landmines this entails.

As to Golds drop-coordinated Soverigns sold to reduce very overheating market and speculation.

TwoHoot's picture

Yes, $85 is well above current production costs.


is is in line with or below the cost of finding and producing new oil.

The treadmill of replacing depleating resources runs faster every year.

eclectic syncretist's picture

Thanks for a very informative post!

kevinearick's picture

how many years ago did we determine that $85 was the artificial demand price and $65 was the cliff price, back to the 1970s, where this oil nonsense began.

the grateful unemployed's picture

once the world goes back on the gold standard, gold in reserve, (still in the ground) will be counted, (just as oil reserves are counted). that situation never hurt the oil drillers

katchum's picture

What about feasibility, exploration, drilling, permitting, construction costs.

The Dancer's picture

They say that the Russians need $80 crude to keep their economy going...since we're almost there, why not just finish off Putin with a spell of cheap crude and perhaps even give the Chinese a little headache with bottlenecks of production all over the country...