If gold bullion or gold stocks are part of your investment strategy you should have an understanding of how mining costs go into mining gold. When a mining company reports their costs they report two different costs, total costs and cash costs. The money they spend at the mine site makes up the cash costs, this is what they spend to get gold from the ground and how many ounces they get.
Cost to Mine
Some of the costs of pulling gold from the earth include machinery, electricity and fuel. Back in 2007-08 when energy prices were at their highest cost to mine went through the roof. The price for gold on the open market was also skyrocketing at an even faster pace. Gold and silver prices were both climbing alone with some other metals like nickel.
Open pit mining
One of the biggest expenses you incur mining for gold comes from the fact that you have to move massive amounts of rock, each ton of or may only less than half an ounce of gold. Right now the price of gold is trading and just over $1100 per ounce that makes a ton of ore worth. However in mining things are a little different, a $2 million haulage truck is used that moves 300 tons or more at a time. Costs and investments are much higher onsite.
Underground mines that you find in Africa, have to move rocks from almost 2 miles underground up to the surface. This consumes tons of electricity, however the ore here is much richer than what you find in open pit mines. They don’t require as much ore to find gold and there is less waste that needs to be removed from the site.
Labor is another huge cost, more so in underground mining operations rather than open pits. Open pit mining can take advantage of machinery rather than human labor to get the job done. When there is a rise in the prices of commodities, the cost of labor also goes up. The mining industry in the US, Canada and Australia all pay very well compared to other countries, however they are more prone to strikes which affects mining operations.
The other cost that mining companies use is total costs. Unlike cash costs, total costs will include corporate overhead and the costs it takes to develop the mine. A gold mine today costs nearly a million dollars to develop and most companies will borrow to pay upfront expenses and pay back over time. One portion of the feasibility studies include the time it will take to pay back the loans and the selling prices during the time the mine is active.
Gold has been a traded commodity for more than 2,000 years and in every corner of the world it forms part of an investment portfolio. Mining has changed over the past three decades, no matter the changes the cost of mining will always be part of the trading scheme. Whether you invest in bullion or mining company stocks understanding how mining works can help you make the most of your investments.