FEATURE: The US is Now the Preferred Destination for Gold Mining Companies
The price of gold is the same around the world but the cost of production unfortunately is not.
According to a recent article by Forbes’ columnist Tim Treadgold, gold mining companies are earning more from US based mines than anywhere else in the world.
“In the commodity world the value-gap is best illustrated by that universal material gold, with the cost profile of one company demonstrating why the U.S. is a preferred destination for new mine developments,” he writes.
Numbers never lie
In his article Treadgold uses South African miner AngloGold Ashanti (JSE:ANG) as a prime example of why the US is the preferred destination for gold mining.
The company, which has four major divisions (South Africa, Africa, Australia and the Americas), reported a four percent increase in gold production to over one million ounces for the second quarter of 2014.
When breaking down production and cost between the four divisions, however, the clear cut winner was the Americas unit.
According to Bank of America Merrill Lynch, the division produced gold at $765 per ounce, almost $100 an ounce less than AngloGold’s operations in Africa – which should be the cheapest mining destination.
AngloGold’s African operations produced gold at $846/oz and the company’s Australian mines at $850/oz.
“When it comes to future investment it is likely that proposals from the Americas division of AngloGold will win a capital allocation ahead of other divisions simply on the question of costs, a situation which could soon attract the attention of environmental groups opposed to most forms of mining,” Treadgold says.
New gold reporting metrics
Initiated by the World Gold Council (WGC), mining companies and investors have adopted new metrics for cost reporting and efficiency called all-in sustaining costs, or AISC.
These metrics being used more frequently to capture a point-in-time look at what it costs to run a gold mine and generate today’s revenue. This includes everything from G&A expenses and sustaining capital for mines are they age.
“The way companies are using the metrics to describe their performance and to educate employees about the real costs of mining, assisting them to make better cost decisions, is really helping companies to improve their financial performances, while simultaneously improving cost disclosure to investors and interested parties,” WGC director Terry Heymann.
While the majority of companies and investors have approved these reporting metrics, not everyone is sold.
Randgold Resources’ (LON:RRS) CEO, Mark Bristow, slammed the reporting tool saying ASIC was just “jiggery-pokery.”
“Why does the gold industry have to be different? What’s the reason? It’s because we are not profitable, so we try to make ourselves look profitable,” said Bristow.
He added that the gold mining company that had originally promoted and adopted the AISC concept by the WGC had since resigned from the council.
Going for the gold
So why is gold so much cheaper to produce in the Americas? The consensus is generally associated with third-world countries and their economy.
Treadgold cites two major companies and their way of thinking behind the US being a better destination for gold mining.
“Cliffs Natural Resources and Apache Corporation have been targeted by activist funds demanding the sale of high-cost, low-profit, assets in Australia with Cliffs under pressure to sell an iron ore mine in Western Australia and Apache planning to sell a 13% stake in a big Australian liquefied natural gas project being developed by Chevron Corporation.”
Many investors have spotted the value gap developing between international mining and oil operations and those in the United States. And many of them are selling off their international assets to reinvest the capital back into U.S. based projects.
Simply put, the United States has become the go-to destination for gold mining companies.
Copper, iron ore surge as Chinese investors unleash demand
The reopening of major industrial economies is sparking a surge across commodities markets from corn to lumber, with tin climbing above $30,000 a tonne for the first time since 2011 on Thursday.
In the wake of mounting evidence of inflation fuelled by higher raw materials prices, investors are also increasingly focused on when the U.S. Federal Reserve might start throttling back its emergency support.
Many banks say the rally has further to run, particularly for copper, which will benefit from rising investment in new energy sectors. Copper is at the highest in a decade, fueling bets it will rally further to take out the record set in February 2011. Steel demand is surging as economies chart a path back to growth just as the world’s biggest miners have been hampered by operational issues, tightening ore supply.
“The long-term prospects for metals prices are ‘too good’ and point to higher prices in the next few years,” said Commerzbank AG analyst Daniel Briesemann. “The decarbonization trends in many countries, which include switching to electric vehicles and expanding wind and solar power, are likely to generate additional demand for metals.”
Trading house Trafigura Group and several major Wall Street banks including Goldman Sachs Group Inc. and Bank of America Corp. expect copper to extend gains.
Copper rose as much as 1.6% to $10,108.50 a ton on the London Metal Exchange before trading at $10,080 as of 4:07 p.m. in London.
Benchmark spot iron ore prices rose to a record, while futures in Singapore and China climbed.
The boom comes as China’s steelmakers keep output rates above 1 billion tons a year, despite a swath of production curbs aimed at reducing carbon emissions and reining in supply. Instead, those measures have boosted steel prices and profitability at mills, allowing them to better accommodate higher iron ore costs.
Spot iron ore with 62% content hit $201.15 a ton on Thursday, according to Mysteel. Futures in Singapore jumped as much as 5.1% to $196.40 a ton, the highest since contracts were launched in 2013. In Dalian, prices closed 8.8% higher.
Erik Hedborg, Principal Analyst, Steel at CRU Group commented: “Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise. Iron ore producers are enjoying exceptionally high margins as well, around two thirds of seaborne supply only require prices of $50 /dmt to break even.”
Still, some analysts including Commerzbank’s Briesemann expect a short-term correction as metals become detached from fundamentals. There’s also a risk that China could engage in policies that may cool demand for iron ore and copper.
The metals rally has boosted concerns about short-term Chinese demand. Some manufacturers and end-users have been slowing production or pushing back delivery times after costs surged, while weaker-than-expected domestic consumption has opened the arbitrage window for exports.
Tin climbed as much as 2% to $30,280 a ton on the LME, boosted by rising orders for the soldering metal. Tin is at the highest since May 2011, with a 48% gain this year making it the best performing metal on the LME.