Graph: The Price of Gold & The Cash Cost of Mining Gold

This post looks at the average gold price and the average cash cost of mining gold in recent years, in the graph below. The averages are over each year.

Data Source: VM Group, Haliburton Mineral Services

From the graph, you can see that both the gold price and the cash cost of mining gold have been increasing over the years. The difference between the two has also been increasing.

What is cash cost?

The cash cost of mining or producing gold is a term commonly used by the mining industry. It is essentially the operational cash cost of the mine per unit of production. The exact definition may vary by company. It generally includes transport, refining and administration costs and royalties, but excludes taxes, depreciation / amortization (this is a non-cash cost), financing and company-level costs (e.g. head-office expenses). Hence, the cash cost is different from the production cost of the mine.

Why is cash cost important?

The cash cost is commonly used to compare across mines. Since the gold price is the same, the mines with the lower cost would generally have higher profit margins and have a greater buffer when the gold price drops. Hence, investors often look to invest in the lowest-cost producers.

Why has the average cash cost increased?

The large increase in gold prices in recent years has allowed previously economically unviable gold assets to become viable to mine. In addition, cash costs have increased due to mining of lower-grade ore (mining to a lower cut-off grade), increase in operational costs (such as fuel costs, labour costs and consumables) and general inflation. For example, due to the commodities boom in the past few years, the demand for skilled miners and managers in the mining industry has increased tremendously, leading to an increase in their wages.

For a longer history of gold price, cash cost and production cost, you can take a look at this presentation by CPM Group. The general trend is the same.

You can also find here a longer history of the gold price alone.

Data Source: VM Group / Haliburton Mineral Services; Graph: Generated by me