Prime Meridians – Here’s The World’s Best Gold Mine Right Now

This week in Pierce Points:

China created a fund for bad mining debt. The state-backed pool will be used to bail out struggling miners like MMG.

SEC tried again on new resource rules. International petroleum and mining companies got a little break, but not much.

Argentina signed up $14 billion for shale. ExxonMobil will pay for the drilling and fracking mega-deal in the Vaca Muerta play.

Kazakhstan got China’s first Silk Road investment. Chinese companies will tap $40B in funds for uranium, oil, and fertilizer.  

Big backers pushed lithium. Rio Tinto and the government of Chile both said the metal is the wave of the future.

Here’s The World’s Best Gold Mine Right Now

The mining industry is looking for new things. Whether it’s new metals like lithium (as the government of Chile is hoping), or new regions like the Silk Road that Chinese investors are betting on, there’s a sense of reinvention happening in the business.

New sectors and new geographies could indeed be helpful during the current downturn. But there’s a more basic response needed from mining companies, investors, and government today.

Go back to what works.

I remember years ago meeting with a business development manager from a major mining company. And asking him about a gold mine acquisition he recently forged — pressing him on what the production costs would be for the operation.

“Costs rise and fall,” he said. “It could be $200 per ounce, it could be $800. All I know is, this is a lowest-quartile producer. It will be in business when the rest of the industry isn’t.”

And that’s the key.

Cost curves are critical to our business. As the exec observed, if our assets are at the lower end of global costs, they will survive as most others die off. At which point, we should almost by definition see a turnaround in prices as supply constricts.

Too often however, the concept of production costs gets overlooked in project development. Because it’s not easy to quantify.

Costs of course depend on variables like size and grade — metrics that are relatively straightforward. And often these are taken as proxies for profitability: “It’s big, so someone will want it.”

But size and grade are only one part of the picture when it comes to production costs.

Witness AngloGold’s Nuevo Chaquiro discovery in Colombia, which contains nearly 4 million tonnes of contained copper at a very good grade of 0.65% (along with over 6 million ounces of gold).

Sounds pretty good right?

And yet rumors are, Anglo is trying to sell this giant. Likely due to the fact there’s another component to the production and development costs here: depth.

The deposit is located a few hundred meters below surface — making development more difficult and expensive. You can see the challenge in the figure below (the black dots for drill hole collars show where the ground surface is, with the purple and red ore shells well below).

Screen Shot 2015-12-18 at 9.40.18 AM

Source: AngloGold Ashanti

Bottom line: deposit geometry also plays a key role in costs. Part of the reason why the ill-fated Pascua Lama deposit on the Chile-Argentina border was considered so valuable: the high-grade gold mineralization is right at surface and very easy to mine.

Of course, that deposit suffers another issue: infrastructure. Being located in a remote, high-altitude part of the Andes mountains (not to mention smack-dab on the border between two sovereign nations).

So location is another part of the profitability equation. A lower-grade mine can be profitable if it’s near roads, cities, and power; where a rich deposit in the middle of nowhere might struggle to make pay.

All of these variables make it sometimes daunting to try and forecast production costs — especially at the exploration stage, when key qualities of a deposit can be nebulous. But keeping costs in mind is critical today. If we can find a deposit that will lead the world in profitability, someone will want it — good markets or bad.

So where might the world’s most profitable mines be found? To get an idea, the chart below shows production cash costs for the most recent quarter from the world’s three largest gold companies: Barrick, Newmont, and Goldcorp.

Screen Shot 2015-12-18 at 12.00.59 PMSource: company filings

Here we see the world’s lowest-cost gold mines laid out. The top 5 being:

Marlin, Guatemala (Goldcorp) – $216/oz

Penasquito, Mexico (Goldcorp) – $268/oz

Cripple Creek & Victor, USA (Newmont) – $295/oz

Lagunas Norte, Peru (Barrick) – $344/oz

Cortez, USA (Barrick) – $394/oz

So what makes these mines such profit machines? And what can they teach us about where we should be looking for similarly-valuable deposits?

One key is: stuff that comes along with the gold. With the two lowest-cost mines — Marlin and Penasquito — benefitting from by-product metals that help lower the overall production costs for gold.

In Marlin’s case, that’s silver. With Penasquito it’s silver plus lead and zinc. 

Grade can help: Marlin’s ore runs over 3 grams per tonne, very high for a large-scale operation like this. Likewise, Cortez in Nevada ran nearly 2.4 grams per tonne during the most recent quarter.

Interestingly however, a top producer like Lagunas Norte runs a gram gold per tonne or even less. Meaning that grade alone can’t explain how this mine yields market-beating production costs. 

This is where another, often-overlooked factor comes into play: metallurgy. 

That’s because Lagunas Norte, along with fellow top-fivers Cortez and Cripple Creek, produces gold from oxide ore — using low-cost heap leach processing. 

Where costs for milling conventional ore can run up to tens of dollars per tonne, heap-leaching costs can be just a few dollars per tonne. Giving oxide gold deposits an order-of-magnitude lift in profitability — especially when they’re located in well-established mining districts like Nevada (Cortez) or Colorado (Cripple). 

On that front, it’s also worth noting that all of these world-leading mines are located in the Americas. With South America particularly noted as having significantly lower input costs for things like labor than many other gold mining centers like Australia or South Africa. (Although low cost producers #6 to #8 on the chart above are all located in Asia-Pacific: Batu Hijau, Indonesia; Waihi, New Zealand; and Tanami, Australia.)

All of which is worth considering as we look at where to explore and develop today. Competition is diminishing with the current downturn, so we have more freedom to go where we choose — and that could be a great opportunity to grab projects in places where the profit-enhancing factors above are known to come together. 

Here’s to costing it out,

Screen Shot 2015-10-13 at 8.54.15 PM

Dave Forest

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