A significant portion of global gold production is now operating at a loss, although there are still other factors that companies must consider before shutting down mining operations, according to the consultancy Metals Focus.

Gold prices have fallen below $1,100 an ounce for the first time since early 2010.

Some might assume the industry is still in good shape since costs in the first quarter averaged $687 an ounce on a total cash cost basis (TCC) and $878 on an all-in sustaining (AISC), the consultancy said in a report Tuesday.

“However, the cost curve tells a different story,” Metals Focus said.

The company cited data on some 1,650 metric tons of annual production. On a TCC basis, at $1,100/oz, just 4% of the cost curve is underwater, although this would increase to 10% if gold was to fall to $1,000 an ounce. However, on an AISC basis, the proportion of loss-making mines at $1,100 swells to 24%, or 400 tons of annual gold production, Metals Focus reported.

“But before we draw to the conclusion that production is therefore about to fall dramatically, there are a whole multitude of factors that need to be considered,” Metals Focus said. “Firstly, closing a mine in itself is often a very costly undertaking. The workforce for instance, may be entitled to some redundancy or retraining payments. Meanwhile, decommissioning of the process plant and mining equipment,

as well as reclamation of the land and watercourses, has to be accounted for. Because of this, rather than closing an operation, mining companies will often be prepared to operate at a loss in the short term in the hope that commodity prices recover.”

Further, some 20% of the current unprofitable production on an AISC basis is in South Africa, Metals Focus said. As has been witnessed in the platinum industry, output cuts there are difficult to make due to union representation and the country’s already high unemployment.



In contrast, Australia, which has 18% of the loss-making production, is a more likely candidate to see some production cuts.

“This said, closing a mine is often the last choice; instead companies are looking at other ways to lower costs,” Metals Focus said.

By Allen Sykora of Kitco News; asykora@kitco.com