Updated 8/7/2015 – Silver is posting solid gains in early A.M. Friday trading as bargain hunters jump back in pushing silver above the $15.00 mark. Gold last reported a.m. is $1099.40 and silver is $15.05.
According to Metals Focus, a significant portion of global gold production continues operating at a loss.
Investors may believe 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. Metals Focus said, the cost curve tells a different story.
The company reported data on around 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.
“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, Metals Focus said some 20% of the current unprofitable production on an AISC basis is in South Africa. 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.
The consultancy group believes that for some mining companies at the top end of the cost curve, the future looks bleak, and closures are inevitable. Over the next 12 months, they expect a decline in output of around 75 tonnes.
Never in history, have gold and silver failed to act as a hedge against inflation and insurance against losses in paper markets.
Global debt is unsustainable and that includes U.S. debt as well. This is the very reason governments and central banks continue purchasing gold and silver while directing the media to portray these assets as “dead.”
The opportunity to purchase precious metals below production costs defies traditional markets but then again, markets haven’t seen normalcy in many years.
When stocks and currencies are long gone, gold and silver will be left standing. History doesn’t lie.
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