JOHANNESBURG (miningweekly.com) – The cost of producing an ounce of gold under the World Gold Council's new all-in cost metric is $1 500/oz, says Gold Fields CEO Nick Holland.
Holland, who addressed the Gordon Institute of Business Science last week, says that, with the gold price at $1 300/oz, the global gold industry is loss-making.
He says that the industry has been remiss for many years for failing to report what it really costs miners to produce an ounce of gold, a pound of copper and a ton of coal.
“We’ve got an industry that is actually going through cost escalations that are slowly driving it into the ground,” he adds.
Cost per ton rising 12% a year in the last five years means a doubling of costs every four years; simultaneously, yields are falling.
Exploration budgets are rising and mining companies are spending more to find less.
“Gold is becoming scarce and resources are becoming scarce,” says Holland.
Return on equity and return on capital employed have been in decline for the last three years in a row to 2012 and gearing ratios have rocketed as a result of troubled companies borrowing more money to keep existing operations afloat.
The top 40 mining companies are in serious financial trouble and operating cash flows are insufficient to cover investments.
The unprecedented drop of the HSBC global mining index, made up of 183 mining companies worldwide, clearly illustrates that investors are turning to other sectors and stretching mining's equity model to breaking point.
A lack of money translates into an absence of mining projects, which augurs badly for the future.
Multibillion-dollar projects are being delayed and cancelled the world over, existing operations are being cut back and there are weekly reports of mining companies downsizing and retrenching.
“The industry is in crisis and it’s under threat,” Holland says.
Although governments the world over are wanting more taxes and royalties from mines, there is very little for governments to take.
Investors are similarly stricken with only 10% for spread around from the $2-trillion revenue of the top 40 companies, which indicates that revenue from the first 27 working days of mining is going towards paying the bills and from the last three working days towards providing a return to investors.
The Dow Jones industrial index and the FTSE 100 index are both rising sharply as investors desert the sector and put their money elsewhere.
Platinum mining, which, with gold, employed up to three-quarters of the 500 000 people employed directly by the South African mining industry as a whole, was also under water.