|
While the debate on the dynamics of the gold market continues, at least
the top gold miners production cost provides us with a floor price. Or
rather, a basic minimum price level. I get a good laugh when I read
analysts suggesting that the gold price will fall back to $450-$700.
For the gold price to fall back to $450, then we would need to lose 95+%
of global gold mine supply.
Due to two factors of rising energy prices and falling ore grades
in the gold mining industry, COSTS WILL NEVER go back to where they were a
decade ago. Again, the only way for that to happen is if a
large percentage of gold mine production was shut down.
Furthermore, analysts continue to wrongly forecast the gold price based
mainly on gold supply and demand forces. This is a NO-NO. The
overriding factor that has determined the gold market price has been the gold
mining industry cost of production. I proved this point by showing
the increase in the gold production cost at Homestake Mining (the United
States largest gold mine 1970’s) from 1971-1979:
Homestake Mining was producing gold at the cost of $42 an ounce in 1971
when the average price was $40.80. Thus, Homestake Mining lost money
producing gold in 1971. However, as energy-driven inflation ravaged
throughout the economy as the price of a barrel of oil increased from $2.24
in 1971 to $31 in 1979, this impacted the cost to produce gold
significantly. By 1979, Homestake Mining’s gold production cost jumped
to $247 an ounce.
While it is true that the tremendous demand for gold by investors
also drove the gold price to new highs in the 1970s, we can see that at least
80+% of the increase in the gold price from 1971-1979, in the case of
Homestake Mining, was due to higher production costs.
So, what is taking place currently in the top gold mining industry as it
pertains to production costs?
The Top 5 Gold Miners Total Production Cost Remains Above $1,200
An Ounce
According to my analysis of the estimated adjusted income breakeven of the
top five gold miners, the average weighted cost was $1,204 an ounce for the
first nine-months of 2018:
As we can see, Goldcorp has had a horrible year as their adjusted
breakeven gold production cost was the highest in the group at $1,281.
AngloGold had the second highest cost at $1,257, followed by Barrick
($1,207), Kinross ($1,186) and Newmont ($1,144). Now, the weighted
average breakeven price of $1,204 was based on an average gold price of
$1,282 for Q1-Q3. So, the top five gold miners average profit for the
group was about $78 an ounce during the first nine months of 2018.
However, gold production costs increased by Q3 2018 as the oil price
jumped to $70 a barrel during the quarter while the gold price fell.
So, profits declined in the third quarter. Regardless, we can
see that the total production cost of the top gold miners at $1,204 provides
a base for the current market price of $1,221.
Now, some analysts, investors, and readers may disagree with my “estimated
break-even gold price,” but if we use another metric, we see similar
results. Because the gold mining industry is extremely capital
intensive, it takes a massive amount of capital funds to sustain
production; we can look at the Free Cash Flow as a guide.
To arrive at Free Cash Flow, we subtract the gold mining company’s CAPITAL
EXPENDITURES (CAPEX) from their CASH FROM OPERATIONS. Here is an
example of Barrick’s Free Cash Flow by looking at the Cash Flow Statement in
their Q3 2018 Report. Barrick reported cash from operations of $1,354
million while spending $1,026 million on CAPEX during Q1-Q3 2018, netting
$328 million in positive free cash flow:
In the first nine months of 2018, the top five gold miners combined net
Free Cash Flow was $542 million. While that is a nice chunk of change,
the five gold mining companies produced 13.2 million oz of gold.
By dividing the $542 million in free cash flow by the 13.2 million oz of gold
production, the group made a net $41 of free cash flow per ounce:
So, my estimated profit for the group Q1-Q3 2018 was $78 per ounce while
their Free Cash Flow per ounce was $41. While it’s not an exact
science, we can see that the gold miners aren’t making money HAND-OVER-FIST
producing the best quality store of value and money on the planet.
Of course, some analysts would suggest that some of the CAPEX the gold
miners are spending are for replacing reserves and adding new
projects-mines. Maybe this is true, but if so… SOMEONE NEEDS TO TELL
THE GOLD MINING INDUSTRY. Why? Well, if we look at the
next two charts, the CAPEX the gold miners are spending most certainly isn’t
replacing or growing production.
As we can see, production from the top four gold miners has continued to
decline even though they are supposedly spending money to replace and grow
production. The gold mining industry separates CAPEX spending into two
categories:
- Sustaining CAPEX
- Expansionary CAPEX
Well, we can clearly see that the “Expansionary CAPEX” that these gold
miners publish in their financial reports doesn’t seem to be expanding
production. Now, if we look at what is taking place in the Top five
gold miners over the past three-quarters, the trend continues:
Total gold production from Barrick, Newmont, AngloGold, Kinross,
and Goldcorp fell from 14.9 million oz Q1-Q3 2017 to 13.2 million oz during
the same period this year. That is an 11% decline in
production in just one year. So, what’s going on with all the
expansionary CAPEX spending? Ah??
Now that we have an idea of what it costs to produce gold from the top
gold miners, why are the forecasts of $450-$700 incorrect?
Harry Dent’s $450 Gold Price Neglects The Number One Factor Of
Price
Harry Dent became famous due to a few forecasts that he got right out of
1oo. However, his ongoing predictions for $450-$700 will never
come true because Harry neglects to incorporate one of the most important
factors in determining the gold price… COST OF PRODUCTION.
While Harry continues to write about the coming deflation and why the gold
price would not do well during this period, Charles Nenner has stated that
the gold price actually does well during deflationary periods. So,
which is it? Well, in the future, past analysis won’t matter as much
due to the collapse of global oil production and its impact on the value of
most assets.
But, if we look at Harry Dent’s chart on the future gold price, we can see
that something has gone horribly wrong with his forecast:
Harry Dent’s forecast of the gold price was made back in April 2017 is
shown in the small white graph at the upper left corner of the chart. According
to Harry, the gold price should have dropped to $700 by the middle of 2018,
corrected higher and then was projected to continue falling to $450 by 2020.
So far, the gold price has remained above $1,200 an ounce, even reaching
$1,350 at the beginning of 2018.
Dent used technical analysis and the popping of a TYPICAL BUBBLE to arrive
at his gold price targets of $700 and $450. Unfortunately, basing one’s
forecasts on technical analysis only is a huge mistake because you have left
out the most important ingredient… ENERGY.
My chart shows that the gold price has increased since the low at
the beginning of 2016, due to HIGHER ENERGY PRICES:
The oil price fell to a low of $43.29 a barrel in 2016, thus pulling down
the cost to produce gold. However, as the oil price increased to $67.55
in 2018, it impacted the gold miners production cost. But, there is
something even more important if we compare the oil price and gold production
cost in 2004 versus 2016.
Here is a chart of the top two gold miners, Barrick and Newmont, estimated
break-even cost since 2000:
In 2004, the top two gold miners estimated total production cost was $366
based on a market price of $410. However, by 2016, Barrick and
Newmont’s combined production cost increased to $1,123 per ounce. What
is quite fascinating is that the oil price in 2016 at $43.29 wasn’t much
higher than the 2004 average oil price of $41.51. So… WHY WAS
THE GOLD PRODUCTION COST THREE TIMES HIGHER in 2016 versus 2004, while
the oil price was only a few bucks higher???
While it is impossible to understand all the valuables why it cost so much
more to produce gold today than it did 10-15 years ago, I believe the Falling
EROI – Energy Returned On Invested is the main factor as it has THUNDERED
throughout the entire economy. It doesn’t matter if the oil price falls
back to $30, it will not lower the overall cost to produce gold all that
much.
So… HARRY DENT, it’s time to update your analysis.
In future articles I will explain with the gold price will likely
decouple from the ENERGY COST ANALYSIS due to the collapse in the value of
most assets as global oil production plummets.
Lastly… as forecasted the CRYPTO MARKET Continues to pop to new lows.
|
|
