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XMFSinchiruna (27.45)

How $2,250 Hold Comes Into Clearer View

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February 19, 2012 – Comments (21) | RELATED TICKERS: ABX , GG , AU

Those of you who have been around the block with me may recall that I've endeavored to periodically update a rough estimate of where the gold mining industry's all-in cost of production is trending. It's not a metric that we encounter frequently amid discussions of gold's long-term price outlook, and I insist that is a frequent oversight by observers of gold from both sides of the philosophical divide.

When gold was getting hammered during Credit Crisis Part 1, comments from the CEOs of Barrick Gold and Gold Fields established that industrywide all-in cost structure in the range of $700-$800. That's one of the reasons why I raised my volume on bullish investment calls as gold approached $700 (also helped that technical indicators corroborated the expectation of disappearing downside risk).

Because the metric is seldom reported or discussed (with kudos to Gold Fields for publishing it regularly), we rely upon occasional remarks or informed estimates to remain up-to-date as to where the floor beneath long-term gold prices may stand.

Well here in 2012, we have corroborating indications from the CEOs of IAMGOLD and AngloGold Ashanti that the industry's alk-in cost structure is presently in the neighborhood of $1,200 to $1,250. According to AngloGold's Cutifani, the figure reaches $1,650 when you factor in the industry's cost of capital. So the next time someone suggests to you that gold prices are wildly inflated by speculative fervor well beyond any notion of a fundamental basis, remind them that the CEO of one of the world's major gold producers estimates $1,650 as the current comprehensive break-even point for the gold mining industry.

 http://www.fool.com/investing/general/2012/02/18/how-2250-gold-comes-into-clearer-view.aspx

That perspective, furthermore, casts a fascinating perspective on the trailing performance of gold mining shares at large. Although cash margins are robust, and lower-cost operators in particular are able to reward shareholders, the majority have struggled with a gold price that has barely -- and perhaps sometimes has failed to -- keep pace with the skyrocketing costs structure.

With capital costs still trending sharply higher, Cutifani's estimate of annual increases of about $150 over the next 4-5 years strikes me as entirely conservative. The condition of global debt and currency markets offers further corroboration by underpinning expectations for continued growth in investment demand. Obviously, under numerous scenarios, gold has the potential to launch dramatically higher, but as conservative expectations to guide medium term investment objectives go, I believe $2,250 gold has never looked any clearer. 

21 Comments – Post Your Own

#1) On February 19, 2012 at 3:54 PM, XMFSinchiruna (27.45) wrote:

Please don't miss speedybure's blog series featuring his top 5 picks for silver. Part 1 is linked here:

 http://caps.fool.com/Blogs/part-1-of-5-speedys-top/711390

Speedy's analysis of the sector is some of the best anywhere!

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#2) On February 20, 2012 at 11:19 AM, XMFSinchiruna (27.45) wrote:

Here is Part 2 of Speedy's Top 5 silver picks:

 http://caps.fool.com/Blogs/part-2-of-5-speedys-top/711537

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#3) On February 20, 2012 at 2:32 PM, XMFSinchiruna (27.45) wrote:

Hehe... That's the worst typo I've ever had in a headline. I swear, the iPhone's easier to type on the the iPad!  :)

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#4) On February 20, 2012 at 3:01 PM, PoorerThanU (< 20) wrote:

Do you know why gold COP is increasing? Producers are developing sites that were not economical when gold was $300. Why are they developing sites? Demand is there from investors and others (?). If the demand evaporates, the cost of production will decline as will production itself. So, please don't use production costs and the change in those costs as justification for higher gold prices. They are the result of higher spot prices...not the cause!  The only factor that will send gold to $2,250 (or higher) is demand.

Oil (and any other commodity) works the same way....

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#5) On February 20, 2012 at 3:38 PM, XMFSinchiruna (27.45) wrote:

PoorerThanU,
Price is a product of supply and demand. Any look at either side of the equation to the exclusion of the other would be incomplete.

The all-in COP builds a floor beneath which existing production volume can not be sustained for long. Elevated and still-increasing demand of course remains the driving force behind he gold bull market, but the cost structure places the current price into very insightful context or those millions and millions of gold bears who presume that today's price represents rampant speculation beyond the fundamental underpinnings of the gold market.
Cutifani's price outlook stems from a very conservative application of the ongoing demand trend paired with the industry's careful read of the macroeconomic landscape as pertains to currencies and gold. The cost of production provides a poignant and timely baseline from which to apply those incremental expectations.
Also, it is false to state that gold mining costs are higher solely because of the rising price of gold. That is certainly a factor, particularly with respect to labor costs. But many of the trailing changes in the cost structure are independent from the gold price. The oil price is a goid example. 
The gold mining industry appears unanimous in its expectation of continuing increases in the cost structure, so unless you have information to override that expectation of theirs, then I would suggest you prepare for gold to reach $2,250 or higher.

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#6) On February 20, 2012 at 3:40 PM, XMFSinchiruna (27.45) wrote:

Here is Part 3 of Speedy's excellent blog series.

 http://caps.fool.com/Blogs/part-3-of-5-speedys-top/711781

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#7) On February 21, 2012 at 11:27 PM, FleaBagger (29.80) wrote:

I hate to be a wet blanket, but the production of gold is insignificant compared to the sale and purchase of existing gold bullion, and cannot set a price floor. Of course, accelerating inflation of the supply of a currency sets a price floor for gold in that currency, and we need not worry about dropping gold prices as long as central banks are trying to push their currencies off the cliff.

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#8) On February 22, 2012 at 10:31 AM, XMFSinchiruna (27.45) wrote:

FleaBagger,

You're not a wet blanket... you're just all wet behind the ears.

Mine production supplies roughly 70% of total gold demand from the global market, and that percentage is expected by many observers to climb as recyclable inventory dwindles the further we extend -- time wise and price wise -- into this decade-long bull market.

I know where you're going with the thought process. But trust me, you did not just outsmart the World Gold Council.

Go ahead, declare a one-week moratorium on global mine production, and see what happens to the price. :)

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#9) On February 22, 2012 at 12:10 PM, SN3165 (< 20) wrote:

 

Looks like Brigus is headed in the right direction... grades are upnice in the first two months of 2012

 http://www.mineweb.com/mineweb/view/mineweb/en/page66?oid=145785&sn=Detail

 

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#10) On February 22, 2012 at 2:02 PM, XMFSinchiruna (27.45) wrote:

SN,

Put your ear to the computer screen.... can you hear my sigh of relief?  :)

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#11) On February 22, 2012 at 2:13 PM, SN3165 (< 20) wrote:

Haha. Excited!  I am happy with the projected 2012 numbers as well.  I think they are setting themselves up to BEAT their projections. Instead of setting lofty projections and failing to hit them

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#12) On February 22, 2012 at 2:14 PM, SN3165 (< 20) wrote:

Haha. Excited!  I am happy with the projected 2012 numbers as well.  I think they are setting themselves up to BEAT their projections. Instead of setting lofty projections and failing to hit them. I'm sure Sandstorm is happy as well, who own 12 percent of the stream.

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#13) On February 22, 2012 at 2:15 PM, SN3165 (< 20) wrote:

By the way, Sandstorm has had quite a run lately ! I do love that Ming mine stream they own  - no ongoing payments required.

"Sandstorm is entitled to purchase 25%-32% of the first 175,000 ounces of payable gold (depending on metallurgical recoveries), and 12% of the payable gold thereafter. There is no ongoing cost per ounce for the gold delivered from the Ming Mine."

I am still anxious to see the next deal. 

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#14) On February 22, 2012 at 2:30 PM, XMFSinchiruna (27.45) wrote:

I love the Ming Mine as well, only as a Rambler Metals shareholder. I met their management team in Vancouver, and was SO impressed by the intelligence and enthusiasm of those guys.

As for being anxious to see the next deal, that's how I feel about SLW! :)

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#15) On February 22, 2012 at 3:49 PM, SN3165 (< 20) wrote:

I am having an awful lot of trouble holding onto my cash reserves right now..

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#16) On February 22, 2012 at 4:52 PM, XMFSinchiruna (27.45) wrote:

Agreed, but I feel it is important to keep some dry powder given the risks of another credit event now that Greek debt has been repriced wiothout declaring a "default" that would trigger payment on all the insurance folks are holding via credit default swaps. The cat's out of the bag now ... if default will never be classified as default, than the insurance contracts known as credit default swaps ... shhh ... are worth precisely SQUAT!

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#17) On February 23, 2012 at 10:06 AM, johnybottom (21.14) wrote:

Thoughts on this: http://www.snl.com/Cache/1500039669.PDF?D=&O=PDF&IID=4288058&Y=&T=&FID=1500039669

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#18) On February 23, 2012 at 10:17 AM, XMFSinchiruna (27.45) wrote:

I'll give you my thoughts and my feelings; since they are distinct.

Feelings: disheartening, frustrating, Arrgh!

Thoughts: Developing 30 underground stopes costs money. The short road to sustainable profitability must be walked by whatever means necessary.

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#19) On February 23, 2012 at 10:18 AM, XMFSinchiruna (27.45) wrote:

Article coming out on it later

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#20) On February 23, 2012 at 11:27 AM, stoverjj (< 20) wrote:

Any idea why BRD is down 9% this morning?  I'm considering adding to my position at these prices.

 

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#21) On February 23, 2012 at 11:40 AM, johnybottom (21.14) wrote:

stover - read #17

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