Color Outside the Lines

 
Richard (Rick) Mills
Ahead of the Herd
As a general rule, the most successful man in life is the man who has the best information
Mining is an extremely capital intensive business for two reasons. Firstly mining has a large, up front layout of construction capital called Capex – the costs associated with the development and construction of open-pit and underground mines. There are often other company built infrastructure assets like roads, railways, bridges, power generating stations and seaports to facilitate extraction and shipping of ore and concentrate.
Capex costs are escalating because:
  • Declining ore grades means a much larger relative scale of required mining and milling operations
  • A growing proportion of mining projects are in remote areas of developing economies where there’s
   little to no existing infrastructure
There is also continuously rising Opex, or operational expenditures, to consider. These are the day to day costs of operation; rubber tires, wages, fuel, camp costs for employees etc.
The bottom line? It is becoming increasingly expensive to bring new mines on line and run them.
The reasons behind flat-lining gold production, and record cash and all-in costs, are numerous:
  • Production declines in mature mining areas
  • Slower than expected ramp-ups of output
  • Development time up
  • The entire resource extraction industry suffers from a lack of skilled people
  • Extreme weather
  • Labor strikes
  • Protests
  • Increasingly more remote and lacking in infrastructure projects
  • Higher capex costs
  • Increased resource nationalism
  • Increased environmental regulation
  • More complex metallurgy
  • Lower cutoff grades
In 1998 the world’s top two highest grade mines were SMM’s Hishikari Mine in Japan @ 50g/t and Barrick’s Meikle mine in the U.S. @ 32g/t. In 2011 the world’s top two highest grade mines were Newcrest’s Gosowong in Indonesia @ 25g/t and goldcorp’s Red Lake mine in Canada @ 24g/t.
In 2014 Klondex Mines Fire Creek Mine in the U.S. was the world’s highest grade mine @ 44g/t and coming in second place was Kirkland Lakes Macassa Mine in Canada @ 22g/t. Declining mined and mineable gold grade is a direct result of the industry’s inability to discover new high grade/high margin deposits.
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David Morgan is a precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems, and the key reasons for investing in precious metals.
As publisher of The Morgan Report, he has appeared on CNBC, Fox Business, and BNN in Canada. He has been interviewed by The Wall Street Journal, Futures Magazine, The Gold Report and numerous other publications. If there is only one thing to teach you about this silver bull market it is this… 90% of the move comes in the last 10% of the time! Where will you be when this happens?