Monday, June 25, 2007

Gold Market #8 - For Mining It Is All About the Cost of Production

Gold mining, as with many other industries, is all about the cost of production. The mining company cannot control the price of the product, it can only control the cost of production, the difference between the two is profit. From Bloomberg:

Now so-called cash costs -- costs directly related to mining -- for some producers are starting to ease. Companies are finding higher grades of gold (ore) . . . . At the same time, producers . . . . are tapping new gold mines in China and Russia, nations where labor and power are cheaper but where political uncertainty had discouraged exploration before.

Cash costs for North American gold producers covered by National Bank Financial averaged $330 per ounce produced in the first quarter. Average cash costs for those producers have risen from $164 an ounce in 2000, the bank said in a May 25 report. Costs are expected to average $324 an ounce this year and fall to $318 next year after averaging $265 last year, the bank said in a June 5 report.

``Costs have reached a level that is certainly controllable, so any increase in the gold price pretty much goes to the bottom line,'' . . . .

If production costs are more controllable some of the risk to the profitability of a company is also under control. As a result there is less nedd for hedging production, that is locking in the price for of gold.

Miners reduced their hedges against lower gold prices by almost 10 percent in the first quarter, the biggest decline in nine months, Mitsui Global Precious Metals said in a report May 4. This allows the companies to get the full benefit of bullion prices that have more than doubled over the past six years.

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