Demand for haven metal is on the rise, but so are the costs of exploration and extraction
The law of diminishing returns is catching up with gold miners as the financial and operational costs of digging up the precious metal continue to pile up.
As reported by the Wall Street Journal, gold mining firms are enjoying a shining moment as prices surged to US$2,000 for the first time early this month. But rather than start new projects, miners have leveraged their gains toward paying down debt and increasing dividends.
Mining giants Barrick Gold and Newmont Corp have both enjoyed year-to-date share price increases of approximately 47%. Barrick Gold hiked its dividend by 14% for its Q2 payout, whereas Newmont increased its own by 79%.
Barrick Gold CEO Mark Bristow told the Journal that the stores gold added to miners’ reserves since 2000 replaces only half of the gold they mined in that period. Exploration budgets are also shrinking, with Minex Consulting estimating last year’s industry total of US$4.44 billion was 63% below the record peak seen in 2012.
As the search for new gold pushes miners to dig deeper and go into ever-more remote territories, the cost of discovering gold has predictably increased. Mines says the average cost of finding one ounce of gold between 2009 and 2018 was US$62, more than two times the number seen over the prior decade. In a parallel trend, Refinitiv data show that the average cost of mining one ounce of gold, based on the total cash costs plus capital expenditure, was US$253 in the 1990s, and reached US$705 last year.
The issues aren’t confined to quantity; mine quality has also decreased over time. According to precious-metals consulting firm Metals Focus, the average mine grade has slid from more than 10 grams per ton in the early 1970s to 1.46 grams a ton last year. An estimate from the World Gold Council says that all the gold ever extracted from the earth could be gathered inside a 69-foot cube.
Some miners and geologists remain optimistic that lower costs and new rich troves, such as those at the ocean floor, can be unlocked with advances in technology. Barrick and Newmont, along with numerous others, have said they will only greenlight new projects if they’re able to profit with gold at US$1,200.
But as ripe as the opportunity may seem now, miners are still gun-shy. Many still remember the last bull run in gold prices, which summited in the fall of 2011, when miners increased their reserves, kicked off expensive new projects, and went on acquisition frenzies. A lot of that activity turned sideways over the following four years as gold prices dropped by 43%, giving way to extensive industry consolidation.
