When Will the Low Gold Price Start Affecting Miners?

Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I recently wrote this article on the falling price of gold and how it was going to hurt mining companies. In summary, the article highlighted that the average all-in cost of the 20 largest gold miners in the world was $1,306 per ounce in Q4 2012; and if the price of gold falls below $1,300 per ounce, about 30% to 40% of mine production throughout the world is not cash-flow positive. In addition, the average, predicted all-in cost of the world's five largest gold miners is between $1,000 and $1,200 for 2013.

However, as I write the price of gold is trading far below the $1,300 threshold.

So how will this affect miners directly?

As I have mentioned above, the predicted all-in cost for the world's five-largest gold miners is between $1,000 and $1,200 for 2013. As of yet, as these are only predictions, it's not possible to assess how this will affect miners.

Having said that, after looking at data from the company and online, it is possible to establish a more realistic and detailed view of what is happening to miners, and Barrick Gold (NYSE: ABX) in particular.

For example, this table shows how much it cost Barrick Gold to mine each ounce of gold in the first quarter of this year:

<table> <thead> <tr><th> <p>Region</p> </th><th> <p>All-in cost (per ounce mined)</p> </th><th> <p>Cash cost <span>(per ounce mined)</span></p> </th></tr> </thead> <tbody> <tr> <td> <p>North America</p> </td> <td> <p>$820-$870</p> </td> <td> <p>$495-$545</p> </td> </tr> <tr> <td> <p>South America</p> </td> <td> <p>$875-$925</p> </td> <td> <p>$550-$600</p> </td> </tr> <tr> <td> <p>Australia Pacific</p> </td> <td> <p>$1,200-$1,300</p> </td> <td> <p>$880-$950</p> </td> </tr> </tbody> </table>

It costs Barrick more to mine a single ounce of gold in the Australia Pacific region than it does anywhere else. Indeed, it is possible that in this region, the company could already be losing some money on its operations with the average all-in production cost averaging between $1,200 and $1,300 per ounce. The Australian region in particular is well known for its rapidly rising costs, as the mining boom has sent inflation skyward.

It's not just Barrick that is already feeling the pressure 

Goldcorp (NYSE: GG) does not provide an exact all-in cost for each of its mines, but the company does provide a cash cost per ounce for each of its mines and an all-in cost average across its whole operation. Based on the company's all-in costs and overall cash costs, it is possible to establish that the company's all-in cost is on average around 100% higher than its cash cost per ounce.

Goldcorp's all-in costs per mine:

<table> <thead> <tr><th> <p>Mine</p> </th><th> <p>Total cash costs</p> </th><th> <p>All-in cost per mine approx.</p> </th></tr> </thead> <tbody> <tr> <td> <p>Red Lake</p> </td> <td> <p>$476</p> </td> <td> <p>$952</p> </td> </tr> <tr> <td> <p>Porcupine</p> </td> <td> <p>$797</p> </td> <td> <p>$1,594</p> </td> </tr> <tr> <td> <p>Musselwhite</p> </td> <td> <p>$841</p> </td> <td> <p>$1,682</p> </td> </tr> <tr> <td> <p>Peñasquito</p> </td> <td> <p>$611</p> </td> <td> <p>$1,222</p> </td> </tr> <tr> <td> <p>Los Filos</p> </td> <td> <p>$589</p> </td> <td> <p>$1,178</p> </td> </tr> <tr> <td> <p>El Sauzal</p> </td> <td> <p>$946</p> </td> <td> <p>$1,892</p> </td> </tr> <tr> <td> <p>Marlin</p> </td> <td> <p>$102</p> </td> <td> <p>$204</p> </td> </tr> <tr> <td> <p>Marigold</p> </td> <td> <p>$854</p> </td> <td> <p>$1,708</p> </td> </tr> <tr> <td> <p>Wharf</p> </td> <td> <p>$836</p> </td> <td> <p>$1,672</p> </td> </tr> <tr> <td> <p>Alumbrera</p> </td> <td> <p>$14</p> </td> <td> <p>$28</p> </td> </tr> <tr> <td> <p>Pueblo Viejo</p> </td> <td> <p>$472</p> </td> <td> <p>$944</p> </td> </tr> </tbody> </table>

In chart format:

<img alt="" src="http://g.fool.com/editorial/images/53104/1_large.png" />

Once again, based on these estimates, on an all-in cost basis, some of Goldcorp's production could already be unprofitable.

And lastly...

Lastly, Newmont Mining (NYSE: NEM), which does provide an all-in cost for each one of its mines. Once again, it would appear that some of its production is rapidly approaching the level when it becomes unprofitable.

<table> <thead> <tr><th> <p>Mine</p> </th><th> <p>Gold production costs</p> </th><th> <p>All-in cost</p> </th></tr> </thead> <tbody> <tr> <td> <p>Africa</p> </td> <td> <p>$478.0</p> </td> <td> <p>$555.0</p> </td> </tr> <tr> <td> <p>Batu Hijau</p> </td> <td> <p>$960.0</p> </td> <td> <p>$993.0</p> </td> </tr> <tr> <td> <p>Waihi</p> </td> <td> <p>$911.0</p> </td> <td> <p>$920.0</p> </td> </tr> <tr> <td> <p>Tanami</p> </td> <td> <p>$1,195.0</p> </td> <td> <p>$1,247.0</p> </td> </tr> <tr> <td> <p>Jundee</p> </td> <td> <p>$672.0</p> </td> <td> <p>$710.0</p> </td> </tr> <tr> <td> <p>Kalgoorlie</p> </td> <td> <p>$968.0</p> </td> <td> <p>$1,006.0</p> </td> </tr> <tr> <td> <p>Boddington</p> </td> <td> <p>$854.0</p> </td> <td> <p>$873.0</p> </td> </tr> <tr> <td> <p>Yanacocha</p> </td> <td> <p>$520.0</p> </td> <td> <p>$568.0</p> </td> </tr> <tr> <td> <p>La Herradura</p> </td> <td> <p>$717.0</p> </td> <td> <p>$733.0</p> </td> </tr> <tr> <td> <p>Nevada</p> </td> <td> <p>$774.0</p> </td> <td> <p>$814.0</p> </td> </tr> </tbody> </table>

Having said that, the company's most expensive mine, Tanami, only accounts for 4.8% of Newmont's total gold sales:

<table> <thead> <tr><th> </th><th> <p>Gold Sold '000 Oz</p> </th><th> <p>Percentage of output</p> </th></tr> </thead> <tbody> <tr> <td> <p>Africa</p> </td> <td> <p>119</p> </td> <td> <p>9.52%</p> </td> </tr> <tr> <td> <p>Batu Hijau</p> </td> <td> <p>7</p> </td> <td> <p>0.56%</p> </td> </tr> <tr> <td> <p>Waihi</p> </td> <td> <p>30</p> </td> <td> <p>2.40%</p> </td> </tr> <tr> <td> <p>Tanami</p> </td> <td> <p>60</p> </td> <td> <p>4.80%</p> </td> </tr> <tr> <td> <p>Jundee</p> </td> <td> <p>76</p> </td> <td> <p>6.08%</p> </td> </tr> <tr> <td> <p>Kalgoorlie</p> </td> <td> <p>74</p> </td> <td> <p>5.92%</p> </td> </tr> <tr> <td> <p>Boddington</p> </td> <td> <p>200</p> </td> <td> <p>16.00%</p> </td> </tr> <tr> <td> <p>Yanacocha</p> </td> <td> <p>278</p> </td> <td> <p>22.24%</p> </td> </tr> <tr> <td> <p>La Herradura</p> </td> <td> <p>55</p> </td> <td> <p>4.40%</p> </td> </tr> <tr> <td> <p>Nevada</p> </td> <td> <p>351</p> </td> <td> <p>28.08%</p> </td> </tr> </tbody> </table>

So, Newmont's most expensive mine has a very small contribution to the overall profitability of the company.

Foolish summary

The numbers speak for themselves, the biggest gold miners in the world are already starting to see some of their operations become unprofitable and cash-flow negative as the price of gold plummets, which is a problem for investors and mine owners alike. In addition, far from being the safe, inflation-protected asset that gold should be, the yellow metal has become speculative and for the time being, Foolish investors should stay away while traders have their fun.

With talk of mines starting to close, if the price of gold drops to below $1,200 an ounce, the demand for gold could soon begin to outstrip supply, putting a floor under recent declines.

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Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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