Costs are an inherent opzicht of evaluating, advancing and generating profits from any mining property. They often make or pauze projects and are typically the final zekering before вЂњgo/no goвЂќ development decisions are made. Spil such, costs, ter some formВ or another, are one of the fattest topics of discussion ter the mining industry. Despite that fact, I would also suggest that the process for obtaining costs is one of the least discussed topics ter our industry.
The process of obtaining cost gegevens for early stage (prefeasibility level) mine development projects is an significant one. Several questions should be addressed, including:
- When should costs be obtained/considered?
- How is the cost gegevens to be utilized?
- What costs are needed?
- What accuracy is needed for costs to be useful to the estimator?
- What hurdles voorwaarde be overcome to obtain costs?
- Are there specific strategies for obtaining cost gegevens?
NOTE: a cost estimator may be someone dedicated to the task or it may be a mining engineer or geologist responsible for develop-ment decisions related to the property.
Understand what prefeasibility means
An demonstrable generic reaction to when costs should be obtained and considered might be вЂњon-going,вЂќ but for prefeasibil-ity costing the true reaction is вЂњwhen you have a measured and indicated resource.вЂќ Exploration stage properties or properties with only an inferred resource do require cost considerations (scoping or preliminary economic analysis [PEA]) but they are still too speculative and provide only a hint of what could be. Similarly, if much of your engineering work is accomplish and of final feasibility detail (feasibility examine [FS]), youвЂ™ve waited too long and possibly submerged unnecessary costs into the project. Figure 1 highlights the parameters for each investigate level.
While thesis comments may seem rudimentary, the reality is that many te our industry do not fully understand the concept of prefeasibility. It is the authorвЂ™s opinion that prefeasibility is the point at which you have enough scientific gegevens ter arm that you can securely say, вЂњIвЂ™ve truly got something here!вЂќ
If you will notice, I have indicated that prefeasibility is quota upon the amount of scientific gegevens ter mitt, not engineering gegevens. Generally speaking, when injecting a prefeasibility level probe, your project will have had very little engineering finished. This is significant to reminisce because the input gegevens is all you will have to work with when wij talk about the hurdles that voorwaarde be overcome to obtain costs.
Hurdles to obtaining cost gegevens
The output side of a prefeasibility level project provides insight spil to what costs are needed and how the costing gegevens is utilized. For example, for a pre-feasibility level project, preliminary equip-ment lists and subsequent development costs are derived based on the results of trade-off studies for proposed mining and pro-cessing methods (Figure Two). Unluckily, one of the larger tasks encountered during a pre-feasibility probe is related to the process of obtaining costs for the needed equipment.
The three largest hurdles for the cost estimator ter an exploration or mining company are:
- A lack of gegevens to obtain a reasonable quote,
- Very engineered and integrated systems, and
- The time involved to obtain the cost gegevens.
Spil noted earlier, it is typical at the prefeasibility level to have very little engineering gegevens available. For example, while you mayВ know that you have a surface copper project that requires loaders and trucks followed by crushing, milling and flotation, you may not have enough metallurgical work ended to know how fine the material vereiste be ground or how the flotation circuit needs to be configured for the best recovery of all byproducts. This lack of gegevens becomes an kwestie when you call equipment manufactures to obtain budget quotes for their products.
This kwestie of a general lack of gegevens is compounded by the very engineered and integrated systems wij have ter the mining industry today. This is particularly true for the processing side of the equa-tion, where the cost estimator may no longer be able to simply derive overall costs from вЂoff-the-shelfвЂ™ component prices. Ter fact, most manufacturers of elaborate processing equipment will not provide component costs at the prefeasibility level.
The time involved to obtain cost gegevens can be substantial вЂ“ on the order of weeks and months given the strategies that voorwaarde be employed to mitigate the very first two hurdles noted earlier. The more sophisticated the project, the more time is needed to prepare quote requests and gather quotes. Time is money.
Given the hurdles outlined above, the best procurement strategy isВ one that aims to simplify quotes and to mitigate the general lack of gegevens available to you at the pre-feasibility stage. Simply waterput:
- The overall cost accuracy of prefeasibility level development projects is typically +/- 25%. This is an significant opzicht to consider when contacting manufactures and suppliers for equipment pricing because rigid, detailed quotes are not needed. Budget or list pricing is adequate. For example, it is satisfactory to receive a quote of $9.Five million for a finish ball mill. A price of $9,620,423.25 is not necessary.
- If possible, request вЂњbaseвЂќ machine pricing or pricing that reflects commonly configured lumps. Consider which specs are most significant to you and eliminate other options. Base machine pricing levels the playing field inbetween contesting suppliers and simplifies the quote. The number you receive will be more than sufficient for prefeasibility work.
- Manufacturers and suppliers may request a long list of engineering or material specifications ter order to provide a quote. Te the absence of detailed metallurgical and/or engineering gegevens for early prefeasibility stage projects, the cost estimator may be required to make assumptions to pack ter any information gaps вЂ“ for example, feed and outflow particle sizes for a ball mill or conveyor length from the in-pit primary crusher to the secondary crusher.
- Installation costs may be included te the pricing, but it is often preferred that thesis costs be provided spil a separate line-item or spil a function of the capital investment, for example, installation costs are 10% of capital or installation costs are 2x capital.
- Included ancillary equipment may be treated te a manner similar to installation costs.
- To minimize the time required to obtain cost gegevens, the cost estimator may need to enlist co-workers to process quote requests or to subscribe to mining cost databases. CostMineвЂ™s cost estimating implements and gegevens can greatly reduce the amount of time required to obtain costing information.
The acquisition of cost gegevens for prefeasibility level mine development studies is not elementary. A thorough understanding of the three primary investigate levels is required to identify the types and accuracy of costing gegevens adequate for each level. Moreover, a well identified procurement strategy is recommended to overcome theВ hurdles associated with the acquisition of costs.
The entire gold-mining sector wasgoed crushed last month, suffering a full-blown scare.В This wasgoed triggered by an extreme shorting attack on gold by American futures speculators.В Spil fear-blinded traders rushed for the gold-stock exits, they claimed their selling wasgoed rational because gold minersвЂ™ very existence wasgoed threatened by such low gold prices.В But thatвЂ™s a total fallacy, this sector has no problem weathering sub-$1200 gold.
The latest agony ter gold stocks has bot excruciating.В This sectorвЂ™s benchmark of choice thesis days is Van Eck GlobalвЂ™s Market Vectors Gold Miners ETF, better known by its symbol GDX.В It closely mirrors gold stocksвЂ™ long-time leading sector index, the NYSE Arca Gold BUGS Index that trades spil HUI.В The carnage ter thesis two gold-stock metrics has bot incredible, shattering the resolve of most contrarian traders.
Te just two weeks te mid-July, GDX plummeted 22.7% on an exquisitely-timed shorting attack on gold futures late one Sunday evening.В A fright is formally defined spil a 20%+ plunge ter a major index te Two weeks or less.В Almost half of GDXвЂ™s funk losses kasstuk that Monday morning instantaneously after that gold attack.В That battered GDX to a fresh all-time low, the worst levels seen since it wasgoed born ter May 2006!
Gold-stock investors and speculators were so horrified that they kept on selling, forcing GDX another Five.0% lower on close by early August.В While such horrendous levels had never before bot witnessed te the relatively-young GDX gold-stock ETF, they had bot ter the venerable HUI.В Gold stocks were last trading at thesis latest lows 13.0 years earlier te July 2002, when gold wasgoed still meandering near $305!
Having deeply studied and extensively traded gold stocks overheen the past 15 years, I argued ter late July that those funk gold-stock levels were fundamentally lachwekkend.В There wasgoed simply no way to justify gold-stock price levels being so darned low given the far-higher prevailing gold prices.В Te an verhandeling I displayed that gold stocks had never bot cheaper relative to gold, the metal that drives their profits and ultimately stock prices.
Thesis latest epically-extreme gold-stock lows certainly werenвЂ™t righteous fundamentally, they were the product of wild fear run amuck.В Yet spil always te a panic-selling situation, the investors and speculators who gave way to their own emotions to flee at extreme lows didnвЂ™t want to hear the truth.В Right after deluding themselves into selling at the worst possible time, theyвЂ™re coaxed their decision wasgoed rational.
Thesis traders had sold gold stocks spil if gold wasgoed trading at just overheen a quarter of its latest lows, which wasgoed the height of folly.В They sure didnвЂ™t like mij pointing that out several weeks ago, and extracted a blizzard of angry terugkoppeling.В ThatвЂ™s par for the course at extremes when youвЂ™re a uncommon contrarian fighting the groupthink herd.В After writing 665 of thesis weekly essays overheen 15+ years, I truly know how traders think.
Their main argument on gold stocksвЂ™ panic-grade selloff being rational surrounded the costs of mining gold.В ThereвЂ™s a universal belief out there that the gold-mining industry isnвЂ™t profitable under $1200 gold.В I have no idea who commenced this, but I come across it permanently.В And if $1200 is indeed the breakeven point, then $1100 or sub-$1000 gold would surely lead to widespread bankruptcies and a gold-stock apocalypse.
After 15 years of researching this sector more deeply than almost anyone else on the planet, I certainly didnвЂ™t believe that $1200-per-ounce industry cost level wasgoed juist.В But I couldnвЂ™t prove it right away, spil the gold miners hadnвЂ™t released their second-quarter operating and financial results yet.В But since the fine majority ultimately reported Q2вЂ™15 ter the last duo weeks, now wij can dispel that $1200-cost fallacy.
Since thesis prevailing gold-stock prices are so ludicrously undervalued, weвЂ™ve aggressively redeployed capital into this sector ter latest weeks.В WeвЂ™ve bought and recommended to our newsletter subscribers a bunch of elite gold miners with very low production costs than can get through gold prices far under latest lows.В I could lightly cherry-pick thesis elites to display gold mining remains very profitable at todayвЂ™s gold levels.
But a far-superior read on this industryвЂ™s current cost structure comes from this sector spil a entire.В That flagship GDX gold-stock ETF presently holds 39 major miners.В This week I waded through the latest quarterly results of all of them.В Collectively GDXвЂ™s component stocks account for the vast majority of the worldвЂ™s gold mining, so they effectively are the gold-mining industry.В And their costs are far lower than thought.
I built a duo tables that could gezond te the top 34 of GDXвЂ™s 39 components.В Collectively they account for a whopping 97% of this entire leading gold-stock ETF, essentially all of it.В To get an idea about the survivability of this sector, I looked at each minerвЂ™s cost structure, metselspecie on forearm, debt levels, contant flow generated from operations, debt payments, and more.В The key results are summarized ter thesis tables.
A duo notes before wij shatter that myth that gold minersвЂ™ very existence is threatened at prevailing gold prices.В GDX holds a broad range of gold miners trading around the world.В Since foreign markets have different financial-reporting standards than the United States, not all gegevens wasgoed available for every company.В When any miner didnвЂ™t report a specific gegevens point, I had no choice but to leave that field wit.
GDX also contains royalty and streaming companies, which have very different cost structures than the miners.В They generally opoffering miners large up-front payments to help finance mine builds.В And te comeback theyвЂ™re entitled to collect puny recurring payments on thesis minersвЂ™ production overheen the lives of their mines.В They donвЂ™t report costs the same way producers do.В This gold-stock ETF also oddly contains silver miners!
But here are the latest quarterly results of the leading companies te the gold-mining industry.В Each stockвЂ™s symbol and exchange is noted, along with its weighting ter GDX and its market capitalization.В Then the particular 2015 quarter the gegevens is taken from is noted, followed by minersвЂ™ costs vanaf ounce produced.В Thesis include specie costs and all-in sustaining costs for that quarter, and full-year 2015 AISC guidance.
Gold minersвЂ™ cost structures greatly affect their metselspecie positions and specie flow, which are obviously critical for their survivability.В Here each minerвЂ™s metselspecie ter the handelsbank at quarter-end is listed, with the percentage of their current market capitalizations that represents.В That is followed by the contant flows generated from operations.В Companies with strong positive metselspecie flows have virtually zero risk of facing bankruptcy.
Ultimately, each minerвЂ™s quarterly production is noted.В My spreadsheet to evaluate this sector had many more columns with other metrics, but thesis are the key ones that getraind te thesis tables.В Taken spil a entire, the gold-mining industry is much stronger financially than virtually everyone believes today!В This is super-bullish for gold stocks given the gagging cloud of extreme fear that is still suffocating this sector.
Since the 1990s, specie costs have bot the superior measure of gold-mining cost structure.В That is what it actually costs to mine each ounce of gold.В Contant costs include meteen production costs, onsite administration, regulatory, royalty, and tax expenses, along with smelting, refining, and wegtransport costs.В Contant costs are the acid-test measure of what it costs the gold miners to bring their product to market.
And contant costs remain far below current gold levels, averaging just $649 and $620 ter Q2вЂ™15 for the actual gold miners among GDXвЂ™s top 17 and next 17 component companies!В ThatвЂ™s way lower than even todayвЂ™s dismal prevailing gold prices, which means the gold-mining industry will have no problem at all weathering $1100 or even $1000 gold.В Their current mining operations could lightly get through even at $800!
Now I certainly donвЂ™t expect gold prices to slip under $1000, let alone plunge to $800.В GoldвЂ™s latest lows were totally artificial, the product of unsustainable extreme record gold-futures shorting.В But since thesis low gold prices veelzijdig endless hyper-bearish commentary, realize that even if the bears miraculously prove right the gold-mining industry is not at risk.В TodayвЂ™s mix of major gold miners could keep right on producing.
And the entire notion of sector-wide bankruptcy risk is bimbo given the way large gold miners operate.В They run numerous gold mines, all with their own cost structures.В So when times get rough, they can simply mothball the mines with cost levels too high for prevailing gold prices.В And even within individual mines, they have a lotsbestemming of leeway te choosing to mine higher-grade ore if necessary to lower per-ounce costs.
During this yearвЂ™s 2nd quarter where gold prices averaged $1172 before gold wasgoed attacked by the futures brief sellers ter July, the gold minersвЂ™ specie costs were much lower than widely assumed.В Ter theory, gold miners can get through spil long spil the gold price exceeds their specie costs along with general corporate expenses.В They are not included ter contant costs like mine-level administrative expenses are.
But gold mines are depleting assets, with all deposits finite.В So te order for gold miners to proceed to be viable going-concern businesses, they need to permanently detect fresh gold to mine.В This involves lots of exploration, which is very expensive.В So back te June 2013, the World Gold Council introduced a fresh gold-mining cost measure known spil all-in sustaining costs.В They include far more than metselspecie costs.
Te addition to all the meteen specie costs, all-in sustaining costs include all corporate-level administrative expenses along with all costs required to maintain and replenish existing production levels.В The major items included are reclamation and remediation along with all the exploration, mine-development, and capital expenditures necessary to sustain current production levels.В This is certainly a superior cost measure.
When gold-stock bears voorkoop the gold-mining industry needs $1200 gold to sustain, itвЂ™s thesis all-in sustaining costs they are referring to.В Yet te Q2вЂ™15, again before the latest shorting-fueled gold woes, industry-wide all-in sustaining costs vanaf ounce were far below that $1200 threshold.В GDXвЂ™s top 17 component gold miners had average AISCs of $936, while the next 17 looked even better averaging $857.
So even $1000 gold, which again is super-unlikely spil gold rebounds dramatically on massive futures brief covering, isnвЂ™t a problem at all for gold miningвЂ™s survivability.В While there are certainly higher-cost and lower-cost gold producers, spil an industry current production levels are sustainable at well under $1000 vanaf ounce.В ThatвЂ™s not a threat at all, despite being falsely implied spil one te todayвЂ™s gold-stock prices.
And Q2 certainly wasnвЂ™t an anomaly on the AISC vuurlijn.В Most gold miners provide AISC guidance for the entire year.В And since gold-stock investors are so focused on costs thesis days with gold prices so low, the gold miners tend to be conservative ter their AISC outlook to avoid disappointing.В And the full-year-2015 AISC projections from thesis major gold miners are right ter line with their actual second-quarter results!
The gold minersвЂ™ current low cost structure relative to prevailing gold prices wasgoed reflected ter their specie positions too.В Most are sitting on metselspecie hoards so large that they are omschrijving to big fractions of thesis companiesвЂ™ total market capitalizations!В That means they could actually afford to lose money from their operations for many quarters, albeit that certainly isnвЂ™t ter the cards anywhere above $950 gold levels.
Even better, thesis contant positions were growing fairly rapidly ter the latest quarter due to high positive operating specie flows ter this industry.В When any business is generating large metselspecie flows te its ongoing operations, it has virtually no risk of going bankrupt.В And many of the elite GDX gold miners reported operating metselspecie flows that were large relative to their current contant positions and even market capitalizations.
Positive metselspecie flows from mining are exactly what youвЂ™d expect when prevailing gold prices are well above current costs.В I didnвЂ™t come across a single miner ter thesis tables that wasgoed actually losing money ter operations.В Amazingly given the extreme bearishness on gold stocks out there, this industry is still strongly cash-flow-positive.В Gold miners arenвЂ™t just surviving under $1200 gold, theyвЂ™re actually thriving!
But unluckily few investors and speculators realize this, for a duo key reasons.В Since popular fear remains so extreme, traders are seeking out bearish analysis and commentary te order to rationalize their own pessimism.В They donвЂ™t want to admit they were fools to flee gold stocks near fundamentally-absurd 13-year lows reflecting gold prices around a quarter of todayвЂ™s levels!В They want to think that wasgoed wise.
Popular bearishness is always most intense and extreme right near major secular lows, when traders are wrongly wooed an already-devastated market will keep spiraling lower indefinitely.В And for the hardened contrarian traders who can overcome this groupthink fuck-fest of gold-stocks-to-zero nonsense, they are often frightened away by gold minersвЂ™ accounting earnings.В Many if not most are showcasing losses now.
But thesis nonexistent price-to-earnings ratios are very deceiving.В Spil gold minersвЂ™ Q2 results proved, they are generating large positive specie flows by mining gold today.В The negative accounting earnings are not from operating losses, which would indeed menace the viability of gold-mining companies.В Thesis losses are from phat write-offs of gold-mine and gold-deposit asset values sometime te the last four quarters.
Since gold te any particular deposit essentially has a immovable cost to mine, lower gold prices erode future potential profit margins of that deposit.В Accounting rules force gold miners to write down the value of thesis properties even if the latest gold lows are makeshift anomalies.В Thesis non-cash impairment charges can be very large, terrific normal operating profits until the write-downs roll off the books.
Te any other sector ter all the stock markets, such large one-off write-downs would be overlooked by analysts since they donвЂ™t reflect ongoing profitability.В But since virtually no professional analysts go after this despised and forgotten sector, there is no analysis to separate ongoing operations from one-off events.В So until four quarters after large write downs, they greatly skew P/E ratios and scare investors away.
But spil long spil the gold price recovers from its latest artificial extreme-shorting-spawned lows, which is already kicking off, write-offs are truly irrelevant.В Taking impairment charges not only has zero contant influence, but it certainly doesnвЂ™t affect the gold contained te any deposit.В That gold ter the ground is all still there and waiting for higher gold prices, which will quickly restore its economic value and mineability.
The gold-mining industryвЂ™s existence certainly isnвЂ™t threatened with todayвЂ™s $1100 gold, let alone that false $1200 number always thrown around.В The vast majority of the worldвЂ™s gold production today would be profitable on a sustaining ondergrond at $1000, and could lightly sustain a improvised panic-grade plunge under $800.В Gratefully the odds of that happening are virtually zero since gold traders already capitulated.
Gold is overdue to mean revert sharply higher spil American speculators are coerced to voorkant their extreme record gold-futures cut-offs, and the usual massive Asian seasonal buying ramps up.В Thesis higher gold prices will not only greatly boost gold minersвЂ™ profitability, but more importantly tradersвЂ™ confidence ter this left-for-dead sector.В And spil weвЂ™ve witnessed recently, thatвЂ™s going to lead to the gold stocks just soaring.
Spil of the middle of this week, GDX had rocketed Legitimate.6% higher ter just Five trading days since its all-time record lows of early August!В The notion that gold stocks priced spil if gold wasgoed near $305 wasgoed righteous wasgoed ridiculous, and investors and speculators are ultimately beginning to overcome their crippling fear and understand that.В So they are returning to gold stocks, which will accelerate the rally and beget more buying.
The gold minersвЂ™ latest quarterly results just reported te the last duo weeks decisively prove that this industry is far healthier than universally assumed.В Production costs are still way below current gold price levels, ter both cash-cost and the more-importantly all-in-sustaining-cost terms.В This has left thesis miners with massive metselspecie war chests and large positive operating metselspecie flows, exposing surprising financial strength.
With the gold stocks still trading near all-time lows relative to the price of gold which drives their profits, thereвЂ™s never bot a better time to throw powerfully long this contrarian sector.В GDX is a superb ETF which offers exposure to the worldвЂ™s thickest and best gold miners.В Nevertheless, the best opportunities te gold stocks are ter the smaller miners.В Many have lower costs and higher profits, leading to low actual P/Es today.
At Zeal weвЂ™ve bot aggressively buying thesis elite smaller miners with potential gains running from 4x to overheen 10x spil gold mean reverts higher.В Thesis fresh trades are detailed ter our acclaimed weekly and monthly newsletters.В They draw on our decades of exceptional market practice, skill, and wisdom to explain whatвЂ™s going on te the markets, why, and how to trade them with specific stocks.В Since 2001, all 700 stock trades recommended te our newsletters have averaged annualized realized gains of +21.3%!В Subscribe today before gold stocks soar, and take advantage of our 33%-off sale!
The bottom line is the gold-mining industryвЂ™s cost structure is far lower than that $1200 number often thrown around.В The worldвЂ™s fattest gold miners are producing gold on an all-in-sustaining ondergrond for well under $1000 vanaf ounce.В And on a cash-cost voet, they could weather an $800-gold anomaly for many quarters.В Gold minersвЂ™ survivability is not ter question at todayвЂ™s gold prices, they have zero bankruptcy risk.
Amazingly given the irrational bearishness cursing this sector today, most of the larger gold miners are sitting on massive piles of metselspecie.В And thesis are growing rapidly thanks to high positive operating metselspecie flows.В Soon this will be reflected ter P/E ratios spil the asset-impairment write-offs roll off of current-year earnings. В Investors and speculators will abruptly realize just how epically cheap gold stocks are today.