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

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.