THE FRAGILE GOLD INDUSTRY: Gigantic Equipment, Massive Capital Expenditures & Rising Costs

SRSrocco's picture

SRSrocco

By the SRSrocco Report,

The gold industry has been built on the leveraging of debt and energy.  The days of using human and animal labor to produce the precious yellow metal are long gone.  While some gold is still mined the old fashion way, the overwhelming majority is produced by using colossal-sized mining equipment, massive amounts of capital, energy, and materials.  Thus, the global gold supply comes via a very complex industry with a lot of moving parts.  When one of these critical parts are in short supply or removed, then the entire gold supply system disintegrates.

An example of one of the newest complex gold mines in the world is the Pueblo Viejo Mine in the Dominican Republic, owned by Barrick (60%) and Goldcorp (40%), which cost a staggering $3.7 billion to build.  The Pueblo Viejo Mine started production in 2013 and is now running a full capacity.  Gold production at the Pueblo Viejo Mine is over one million ounces per year.  According to Barrick, it's cost of sales at Pueblo Viejo was $564 an ounce in 2016.  However, cost of sales does not include "all costs."  We must also factor General and Administrative, Exploration-Evaluation, Mine Closure and Income Tax expenses.

However, these additional expenses do not include the initial $3.7 billion cost to build the mine.  According to data, the Pueblo Viejo Mine has approximately 15.5 million oz (Moz) of proven and probable gold reserves.  Even though additional gold discoveries at the mine will be added in the future, if we assume a 15-year initial payback period, the annualized capital cost would be an extra $250 per oz of gold produced.

Thus, the $564 cost of sales plus $250 capital cost now equals $814 an ounce.  But, this does not include the additional expenses which would push the actual total cost from the Pueblo Viejo Mine over $900 an ounce.  This is just my simple calculation which shouldn't be compared to the industry's more complex accounting of Net Present Value.  Even though the Pueblo Viejo Mine is Barrick's lowest cost gold mine in the company, Barrick's total cost to produce gold last year was $1,125, based on the $1,251 spot price.  Again, that is my simple "Net Income Break-Even Analysis."

Regardless, the Pueblo Viejo Mine is a very advanced complex mine that processed 7.5 million tons of ore to produce the 1.1 Moz of gold last year.  According to Barrick's 2016 Sustainability Report, the Pueblo Viejo Mine consumed the following in 2016:

Pueblo Viejo Mine Materials & Energy Consumed:

  1. 4.9 billion gallons of water
  2. 3,100 metric tons cyanide
  3. 338,000 metric tons lime
  4. 18.7 million GigaJoules of Energy (3.1 million barrels of oil equivalent)

There are many other materials not included in that list above, but the ability to produce gold at the Pueblo Viejo Mine is only possible from a very complex supply chain.  The majority of materials and energy consumed by the Pueblo Viejo Mine has to be transported to the Dominican Republic Island in the Carribean.

For example, Barrick's mining equipment fleet at the Pueblo Viejo Mine includes following (info from OSIsoft Report):

  1. (34) CAT 789 Haul Trucks
  2. (2) Hitachi 3600 Shovels
  3. (3) CAT 994F Front Loaders
  4. (30) Support equipment

The estimated maintenance budget for just the haul truck fleet is $18 million.  And when one of the 34 trucks goes out of service, it cost one hell of a lot of money.  The truck downtime cost is $700 per hour.  The six tires the CAT 789 Haul truck uses cost approximately $30-40,000 a piece and last a little more than a year.  The CAT 789 Haul truck gets about 0.3 miles per gallon.

(CAT 797F transported by Mercedes Semi-tractor)

Now, the featured picture (above) that I used for this article is not the CAT 789; it is the CAT 797.  The CAT 797 weighs twice as much as the CAT 789, used at the Pueblo Viejo Mine.  However, I just wanted to give an idea of just how big these haul trucks can get.

Furthermore, the mining, excavating and hauling of ore out of the Pueblo Viejo Mine is controlled by high-tech computerized systems.  The hauling of the ore by the large truck fleet is monitored by state of the art technology that designs the most efficient method to remove the ore out of the mine, so very little time is wasted.  Again, time is money.

We must remember, the more technology that is used in a system, the more complex and fragile it becomes.  Of course, technology is great at making large operations run more efficiently and faster, but the downside is that if one or more critical parts are removed, the complex mining system breaks down.  What would happen to gold production at the Pueblo Viejo Mine if cyanide becomes in short supply?  Without cyanide, the processing of gold ore grinds to a halt.

While I have provided one example of the enormous cost and massive amounts of capital needed to produce gold and one mine, let's take a look at what is going on at the top 8 gold mining companies in the world.

Top 8 Gold Mining Companies Costs & CAPEX Spending Surge

It is quite amazing how much more it costs to produce an ounce of gold today than it did at the beginning of the century.  The huge rise in the total cost to produce gold is why the price is nearly five times higher.  Unfortunately, many precious metals analysts suggest that the increase in the gold price is due to either market sentiment or increased demand.  I have stated in several articles that the tremendous increase in the gold price was due to the rise in the price of oil:

However, there are additional factors that also impact the cost to produce gold.  For example, the gold mining industry now has to move a great deal more ore to produce the same amount of gold it did in 2000.  The next chart shows the falling yield in the top gold mining industry from 2005 to 2013:

In just eight years, the top five gold miners experienced a near 30% decline in average gold yield from 1.68 g/t (grams per ton) to 1.2 g/t.  If we went back five more years to 2000, I would imagine it would be closer to a 40% decline in average yield.  Thus, it now takes the processing of 40% more ore to produce the same amount of gold today.  Which means, it now takes a hell of a lot more energy and materials to produce gold today than it did 16 years ago.

This next chart puts into perspective the increased cost to produce gold today versus in 2000:

This graph shows the increase "Cost of Goods Sold" for producing gold at the top 8 gold mining companies in the world.  Even though many of the companies have seen a decline in the Cost of Goods Sold since the peak in 2013, the overall figure is still much higher than it was in 2000.  Some of the companies included in the chart above have seen their Cost of Goods Sold increase significantly because they increased their gold production substantially.  However, Barrick did not have that excuse.

Barrick produced 5.9 Moz of gold with a $553 million cost compared to $5.4 billion in 2016 on 5.5 Moz of gold production.  Here we can see that Barrick's Cost of Goods Sold increased ten times while production is about the same.

According to the data at YCharts.com and these companies' annual reports, the total Cost of Gold Sold in 2000, was $4.9 billion ($4,953 million) versus $23.6 billion ($23,588 million) in 2016:

Now, what is amazing about the figures in the chart above is that the Cost of Goods Sold figure has more than quadrupled while total gold production in the group only increased by 2 Moz.  The top 8 gold miners Cost Of Goods Sold increased from $206 per oz in 2000 to $907 last year.   The huge increase in cost to produce gold is the very reason the price surged from $279 in 2000 to $1251 in 2016.  Let's look at the comparison:

Cost of Goods Sold vs. Gold Price:

2000 vs. 2016 Cost of Goods Sold = 4.4 times increase

2000 vs. 2016 Gold Price = 4.5 times increase

So, if we removed all SUPPLY & DEMAND forces from the equation, it is quite surprising that the gold price is up by the same amount as the cost to produce gold.  However, we need to also look at the rise in capital expenditures.  During the same period, the top 8 gold miners total capital expenditures increased from $1.7 billion ($1,723 million) in 2000 to $6.1 billion ($6,088 million) in 2016:

Again, we can see that total capital expenditure (CAPEX) increased from $72 per ounce in 2000 to $234 an ounce in 2016, while overall production only increased by 2 Moz.  The group's CAPEX spending only increased 3.2 times versus the 4.4 times in the Cost of Goods Sold, but it shows that it cost a heck of a lot more money to sustain or replace production.

If we understand that the present value of gold is tied to its cost of production, then we would realize it has a PRICE FLOOR.  Sure, the gold price could spike lower, but its average annual price has remained close to (or above) its cost of production for quite some time:

This chart represents my "Net Income Breakeven Analysis" for Barrick and Newmont, the two top largest gold companies in the world.  As I also mentioned above, Barrick's cost to produce gold in 2016 was $1,125 when the spot price was $1,251.  Thus, the market has priced gold above its cost of production (in these two companies) since at least 2000.

Lastly, the gold mining industry needs a vast amount of materials, parts, energy as well as a very complex supply chain system to produce the precious yellow metal.  If one part of the supply chain breaks down, then it becomes extremely difficult or impossible to produce gold.  While there are many fragile aspects of the modern high-tech gold industry, I believe ENERGY is the most crucial.

Once the world starts to experience a decline in global oil production, the vast supply chain system will begin to break down.  This will impact the largest mines the most.  I will be writing more about this subject matter and also why a declining global oil supply will push the price of gold up much higher.

Lastly, if you haven't checked out our new PRECIOUS METALS INVESTING section or our new LOWEST COST PRECIOUS METALS STORAGE page, I highly recommend you do.

Check back for new articles and updates at the SRSrocco Report.

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Calculus99's picture

Mining executives take the Gold metal for collectively being THE most useless executive class in all of the markets. 

They're so bad they make the Wall Street execus leading up to the 2008 crisis look good. 

Latitude25's picture

Miner srocks WERE a market until earlier this year.  The ETFs got "adjusted" and now the stocks are DOA just like the metals.  Buy them now and watch them go nowhere, even when the gold price rises.

steve2241's picture

"A gold mine is a hole in the ground with a liar at the top" Mark Twain

https://quoteinvestigator.com/2015/07/19/gold-mine/

steve2241's picture

"...which cost a staggering $3.7 billion to build."  It's staggering because it's phony!  How would a governmental taxing agency go about even verifying such a number!  But it sure makes for a large depreciation expense number on their annual income statement, reducing their tax liability as a result.  I don't know how much tax is avoided by this scam, but it's widespread.  I'm often awed by similar extraordinary sums for plant and equipment.  Heck, you could probably buy the entire island of the Dominican Republic for 3.7 billion dollars!  At least, it seems so. :)

Silver Savior's picture

That's why I keep saying just get the metal itself. It's kind of common sense. These costs to mine are huge and will just get larger. Oh I get it. You all don't have space to store physical metal but you have no problem storing your junk from China.

RollOnShabbos's picture

Gold miner crash is coming. JDST and UVXY - only two stocks I own. It's been a rough few years, but my time will come.

King of Ruperts Land's picture

Gold miners are big bullshitters. No matter how high or low the price goes they will open mines that can produce for just under that cost and be sitting on properties that are just waiting for a slight rise in the price to be opened.

Also the trend is mining is that they give less of a shit about the end product and just like moving the most dirt and making the biggest hole with the biggest trucks and shovels. They have the mentality of kids in a sandbox.

Oh, there is an end product they care about. Bank financing, stock sales and promotion, and executive stock options and bonuses.

David Wooten's picture

I guess it's better to have gold than gold stocks.

King of Ruperts Land's picture

It is better to have a profitable business. With some gold in the vault.

Maestro Maestro's picture

***ALL the mining companies (including that of Jim Sinclair) and ALL mining executives (including Jim Sinclair himself) fail their fiduciary duties thus betray their stockholders by producing and delivering gold and silver to the markets at cost or below cost just to underwrite the gold and silver price suppression schemes of the bankers. SELL all your mining stocks and gold derivatives, sell ALL your stocks and bonds and buy real physical gold and silver.***

Worse than the bankers rigging gold and silver prices and not having the gold that they sold you (or selling gold that they don't have via fraudulent LBMA unallocated paper spot contracts or COMEX Futures contracts) is the fact that we don't even have MONEY today.  Therefore all financial transactions and economic numbers predicated on the existence of money are FRAUD and FORGERIES presently.

Electronic digits and paper fiat currencies in use today are NOT money, according to the law of the country that issues the reserve currency of the world, the US Dollar (Article 1, Section 10 of the US Constitution); or by the tenets of the science of Economics (i.e., fiat currencies are not money because they are not a store of value nor a unit of account due to the fact that NOT ONE fiat currency's value is actually determined or stipulated in concrete legal terms).  Dollars and Euros and Yens are not even lawfully DEFINED as to what they all are exactly; what their economic worth and transactional value is. Hence, fiat currencies simply cannot constitute the legal foundation of any lawful contract!

(Also, there cannot be either inflation nor deflation in the ABSENCE of money.  Both inflation and deflation are monetary events which cannot take place where there literally is no money.)

What we have today is massive GLOBAL FRAUD mascarading as a monetary system based on the (fraudulent) US dollar because all fiat currencies are basically only a derivative of the US dollar, including the Euro, the Yen, the Yuan, the Rouble, the Shekel and the Riyal.

Furthermore,

Why do a few people get the right to print fake fiat money out of nothing and buy your goods and  services with it whereas you have to WORK to obtain the same worthless money created out of nothing?

THAT is the question at the heart of the matter.  That the bankers manipulate interest rates or the price of gold via fraudulent Futures trading (by selling gold that they don't have) with fiat money is a moot point.

To put it differently: why do the bankers get to have anything that they want without working for it and you, you don't?

All this talk about market rigging, monetary theory and fraudulent (paper) gold trading is a cover-up for INJUSTICE.

The US Constitution FORBIDS the use of debt as money; the US Constitution proscribes (debt) notes which is what the US dollar is presently.  Think, all other currencies are just another name for the US Dollar.

What passes for money today is a CRIME, no more no less.

 
People,

You are all aiding and abetting this crime every time you buy, sell, pay or get paid.

And then you ask, Why our leaders, the politicians, the bankers, and our military men and women are EVIL?

The answer is, because they are just like YOU. They are your sons and daughters.

BobEore's picture

but but...
I thought that 'the miners' were our freeends!

GOLD STOCKS! GO OUT N GET EM! For years, that's been the APPROVED MESSAGE... buy \barrick/ n other biggold international finance capital owned outfits... hand over fist.

Jus cause... they be REAL FREENDS of the lil guy! Workin overtime to support the cause of RETURN TO THE GOLD STANDARD...AND saving free enterprise. or sumthin like dat!

and then TOMORROWS MESSAGE...

GOLD MINES EMPTY... MINERS GOIN BUST! ITS a scam! \rising costs... selling under cost of production...

UUGE DROP IN CAPITAL AVAILABLE TO GO TOWARDS BUYING TOP BANNER SPACE on alt-finance media websites!

never been a better time...

to count down the days till MR GOLD finally throws in the beach towel! https://storify.com/SuaveBel/trx-and-the-death-of-illusion
https://storify.com/SuaveBel/struttin-with-some-sutton-mr-gold
https://storify.com/SuaveBel/out-of-afreaka-neither-dead-nor-alive

.29 cents an tickin!

Maestro Maestro's picture

You deserve a medal for collecting all this information and connecting the dots.

BobEore's picture

medal?

naaa. I'll take that 23 foot chest freezer with matching footlocker Monty...
in which to store all the frozen asses of all the sockpuppet minions youse and me gonna DESTROY in this here town,

MmM.

jaxville's picture

I don't get how water is consumed.  Where does it go?   It sure isn't inside the dore bars. Does it stay in tailings ponds forever?  Does all the staff drink it and never pee again?

  enlighten me please

BobEore's picture

The water turns to steam. It takes A LOT of energy to churn out turgid, repetitive messages EVERY DAY of the week...

in which we are reminded that all that steam has gone into clouds of NEBULOUS REASONING, hovering over our heads... with a threatening dispensation of

BUY PRECIOUS METALS TODAY... or you'll never have the chance agin!

You heards it right! Either BACK UP THAT CAT797 and score more shiny RIGHT NOW... or yu be outta luck.

Ummm... Sumthin tells me that the ROI on all that hype-generation has been falling for some time now...

the amount of energy required to produce one naif naive enuff to hand over hard earned fiat for a chance to own over-priced gold and silver coins produced by talmudist mints dedicated to returning ALL global supplies of shiny into the proper hands... eg... the moneypower...

increases yearly... as the "beachball held underwater" stay firmly controlled by shadowy manipulators we dare not name... and weird xhristian-sionist poofs like "TOM CLOUD" are required to provide more and moar support to keep scribblers alive and able to generated the black ink

which flows thru expensive pipelines of propaganda into the lives of gullible readers who think that 'alt-media' outlets are providing them with anything other than the PEPSI VS COKE conundrum.

Cue mindless sockpuppet minions of the $power to rush screaming to the podium, taking back control of the dialogue in order to SAVE BIG GOLD from its' lil critics!

David Wooten's picture

Water has many uses in many big industries - cooling, mixing, transporting, etc. For details on how it is used in big goldmining, I'd just Google it.

Nostradumbass's picture

Can someone put up the cost of production for Bitcoin - BTC?

/s

Maestro Maestro's picture

Bitcoin & all cryptos = CIA = The Fed = ECB

Now you're not only exchanging your labor and your goods for electronic digits created out of thin air, but you also believe that they are (1) scarce (2) thus intrinsically valuable and (3) worth wasting resources like huge amounts of electricity and expensive hardware that has to be constantly replaced because it becomes obsolete the moment you buy it, reducing your ability to mine more cryptos faster.

There is no hope for the human race.

King of Ruperts Land's picture

The more total effort put in to mining gold, the more gold is produced. With bitcoin if more total effort is expended, the same total bitcoin is produced. Traditionally the cost of making bitcoin is about break even. Perhaps some small profit to make the effort worthwhile. Lately I suspect it is extra profitable, due to its price rise. I notice mining rigs are sold out as the mining capacity is rising to absorb that profitability.

Doña K's picture

Just calculated 7cents max.

dogismycopilot's picture

forgetting about energy and cost of data centers.

i think bitcoin is better served as a transaction payment and less a store of long-term value.

99hedges's picture

Soooo...gold is going up in price?

AgAuSkeptic's picture

It's not that precious metals are undervalued but the fact that govt can set the price of precious metals to any number they want. The next investment I'm  seeing is drug companies like Genentech that can price drugs like Tenecteplase to whatever they want and the gubmint will pay, https://www.rxrankings.com/datatable/default/chart/zzzIAR#, the only site that shows FDA approved patient reactions

Latitude25's picture

Not included is the all in sustaining cost which includes the cost of exploration which is not revealing such rich deposits as before.

Doña K's picture

Bottom line, gold has a floor price of $1200 to $1300 Once the costs to produce go up, companies will either find something more rewarding to do with CAPEX until gold price goes much higher.

How can you lose owning gold?