Sunday, July 7, 2013

Review Of American Hard Assets -- Issue No. 4

The Cover Story of this issue is "The Actual Cost of Mining Gold", a topic I have seen addressed a couple of times or so recently.  Since the April and June price plunges in gold, many mines are struggling, although I do not have actual examples of any mines so far shut down to low prices.  Included with this article is a big graphic from Visual Capitalist on gold, where it is and how it is produced (I think I saw this at Zero Hedge not long ago).

This is an important subject.  If real numbers of mines shut down, what would that do to (paper) gold prices?  My initial thoughts are that gold would go up, in that there would be psychological pressure, the visibility of mines shutting down would draw in gold buyers.  I think!  I put this question to a well connected gold guy, and I hope to get some guidance on this point.

Author Eavan Moore discusses the subtleties of "cost of mining".  Here is his second paragraph in which he describes three ways of looking at the costs, they depend on what expenses you include:

"Most gold miners use standards establishes by the Gold Institute in 1996.  A "cash operating cost" covers the amount spent on operations, such as mining, processing and transportation, minus the revenue from selling byproducts.  A second category "total cash costs" adds in royalties and production taxes.  "Total production costs" include depreciation, depletion and amortization, reclamation and mine closure."

[Ed. Note: I have also seen that the more complete cost measurements would have to include other costs like exploration as well as office overhead, etc., he addresses these further below, keep reading...]

Just looking at the two cash cost measures above, Moore points out that there is a pretty wide spread among costs of mining for various gold miners, he finds a low cost producer (Monument Mining, TSX-V: MMY, with an open pit mine in Malaysia) with 2012 cash costs $306 per oz., while labor-intensive operations in South Africa came in at over $1000 per oz (the latter from John Tumazos Very Independent Research).  But Tumazos and Moore both note that total pretax costs are usually much higher, a general range would be $1250 - $1750 per oz.  (Clearly it would be expected that some mines would be much more costly than others.)  A general cost range that high would mean that many miners are operating at a loss (of some sort), that with costs well above current gold prices (around $1226 per oz as I write), the industry is in some some danger...

So, the pressure is on in the gold mining industry for better numbers re total costs to mine it.  Eavan Moore:

"Total costs matter, and there is no standard for reporting them."

South Africa based miner Gold Fields Ltd. (NYSE: GFI) in 2008 decided to calculate a more transparent  "notional cash expenditure" (NCE) that includes other costs as well.  Gold Fields in 2012 provided two numbers:

"average total cash cost": $894 per oz

NCE: $1376 per oz.

That's a pretty big difference.  Goldcorp (GG) has done something similar, their 2012 "cash costs" were some $300 per oz while their "all-in sustaining costs" (these would include general and administrative costs which are substantial) were $874 per oz.  Goldcorp is considered a "low-cost" producer.

Moore writes that there is considerable debate among mining companies about "what counts" and what does not.  They are under pressure to do a more accurate job (likely including more costs) by investors while the local host governments also need to know the actual costs of mining (and so the companies hope for more lenient tax treatment).

Why is this so inconsistent across the gold mining industry?  In a word: "accounting".  Moore notes that companies have discretion on 17 different elements (one of these as an example: costs (and sales figures) for byproducts like copper and silver) as to how they account for costs.

Barry Cooper (CIBC World Markets Report, May 2013) has many doubts that this whole issue of total costs will be made more clear...  Moore quotes VP of Investor Relations Brian Christie at Agnico-Eagle Mines Ltd. (AEM) that Christie forecasts average costs for 2013 to be $1690 per oz, ruh-roh.

The miners appear to have a high risk profile, I will stick with buying gold rather than investing in the miners.


American Hard Assets now has a website, they include daily market updates and other material:


In their "World News Updates" section is a piece on how Ghana has arrested 124 Chinese citizens for illegally mining gold.  What a surprise.  Also in the Updates is a note that the US Mint is now selling 1/10th oz gold Eagles again (I had missed that news) after having suspended their sales for a while, a piece on South Africa finding some of Gaddafi's gold & diamonds there (I saw at ZH that a fair number of other places have the Gaddafi family's gold and assets as well), the Austrian Mint expects good business for its Philharmonics and that Taurus (of Australia) is shutting down its version of the US ETF GLD.


Famed author Peter Schiff contributes "Gold Bull vs. Paper Tiger", an article whose title pretty much explains the article itself.  With all the financial problems out there and lack of trust among parties and conuterparties, stick to the physical...


Michael Haynes (CEO of APMEX, they a nice double-page ad) contributes "What the Rest of the World Knows About Gold That the United States May Not".  Haynes starts his article noting that world central banks became net heavy buyers of gold in 2011, after having been sellers for many years.  He surveys several important countries, from early antiquity (1700 BC for China, 1900 BC for Turkey) to the present.  Not surprisingly, he demonstrates that the USA, with a high GDP, is a low consumer of gold per trillion dollars of GDP compared to the countries he examined.  Here's a summary of a nice table he produced, the USA is based at "100" as compared to other countries in 2010 - 2012 purchases of gold per trillion dollars:


The higher the Index, the more gold a country buys per trillion of GDP, which roughly would measure how much gold is valued by citizens of each country.  India, for example, buys almost 31 times as much gold per trillion dollars of GDP than we do...


Michael Kosares (USAGold) writes "US Mint Sales" in which he notes that April 2013 sales of Gold Eagles (ounces) were the second highest ever: 209,500 oz.  He provides a graph of ounces sold by month from 2000 to present by ounces per month.  A quick examination of the graph shows that Gold Eagle sales have been much higher from late 2008 on (vs. before), but very spiky...  He also shows sales of Silver Eagles, which have been fairly similar, but with the interesting spikes in January of each of the past three years.


Tom Genot writes "Seven Errors Survival Preppers Make".  He leads off with a nice photo of a bunker...  But, instead of going into detail, I will just list the Seven Errors:

1)  Centering all resources and time in preparation for a single event
2)  Stocking too much in one place (he assumes "bugging-out" is a factor)
3)  Collecting anything & everything not knowing what is really important
4)  Blab, blab, blab
5)  Belief that "you already know everything...
6)  Too much dependence on supplies / no "Plan B"
7)  Forgetting to monitor your supplies (eg, expiration dates)

It's a good list, and it's a good article.


Rickard Warnelid (Director, Corality Finacial Group) writes about risks on iron ore projects, but this really, IMO, would extend to almost any mining projects as well.  These risks that need to be studied would include proper modeling of the project, government risks (taxation, rules), infrastructure (need a railroad for iron ore), funding risks, project management and working with investors or other financial backers.


Ed Estlow writes "16 Watches You Want on Your Wrist".  Please recall that this magazine is aimed at the "carriage trade", and the Editor himself has admitted that he likes high end watches.  So, I guess we should get used to seeing high-end watch articles.

I do admit that some of them are quite beautiful...


Gabriel Benson writes "Sunken Treasure" an overview of the two world leading companies in recovering sunken treasure!  The article goes into detail on Odyssey Marine Exploration's (ticker: OMEX) recent find: a haul of perhaps over $100,000,000 (depending on how much they ultimately find, so far at $41,000,000) of  silver from the SS Gairsoppa, a UK British cargo ship that sunk in 1941 off of Ireland.

Odyssey was the company that found silver from a sunken Spanish frigate (a warship) in 1804, Nuestra Senora de las Mercedes, details of this complex case here ($500,000,000 -- and IMHO the money should have gone to Peru, where it was all stolen by Spain!):

A private company, Sub Sea Research (Portland, Maine) is now searching fro some $3 million in Boston Harbor.


Tara Imperatore tells us in "Third Homes" why we should have one.  Um, um.

This is actually an article on a "kind-of" home rental member club:


Susan Kime ("How They Spend") writes about the Knight Frank Wealth Report 2013, which tells us how the REALLY RICH spend their dough.  Much of it is spent on luxury apartments in glamorous cities in the US and UK, where the rich perceive stability.

Also discussed are philanthropy and collecting...  Many of the super-rich collect not so much with an idea to profit, but just to enjoy their assets.


Fred Reed, an author who writes about rare coins, pens a piece titled "Dollars and Sense".  This article is Part One of two, and discusses gold coins (mostly bullion coins) up to and including the American Buffalo.


Other shorter articles in this issue include:

"Restorations and Builds" (about car restoration)
"A Guide to Art Market Indices" (there are a lot lot of 'em, almost like ETFs...)
"Paper Money Autographs" (where someone famous signed an FRN)
"Golden Time Capsule" (some treasure from the SS Central America has been sold)
"Coins of Peace" (the "Peace" silver dollars minted in the 1920s)
"Art Authentication" (more political & subjective than you might think...)


"Mining News" discusses some news on Glencore Xtrata as a new combined company, Rio Tinto's plans to expand the Argyle Diamond Mine ("fancy" (= expensive) pink diamonds from Australia), the government of Quebec's new proposal to raise taxes on miners (I presume that would include Osisko's Malartic mine that I visited), and a story on Anglo American Platinum's ideas of laying off platinum miners in South Africa.


Editor John Garibaldi ("HindSight") wonders which way the Fed is going to go re tapering, reducing or whatever their economic stimulus.  Garibaldi suggests that the below three are the most commonly discussed:

1)  reducing QE (ouch!)
2)  raising the Fed Funds Rate (ouch!)
3)  increasing the interest rates the banks must pay the Fed on excess reserves

He would choose option 3, making the banks pay a bit more for the Fed to hold their excess reserves there, he suggests that it would be the mildest of the three above.

He also suggests getting a bucket of popcorn ready...  I agree!


Bottom Line: If you are interested in gold or in how RICH people do their thing, buy this issue!


  1. Hi Robert, As always, nice blog. Reference is made to the blurb on mine closures due to low metal prices. To try to keep profits up, one thing one could anticipate is that the CEO's will take the highest grades of ore now, high grading.. Some mines, outputs could actually increase as a result. In the longer term, when we are all dead, the payable mineralization must cover all natures of costs, lest there be no mines nor mining. Nobody ever said it was easy.

  2. Side note: you sure Eavan Moore is a man? The one I know who writes a lot about mining is a woman.


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