For some, it's hard to imagine 3 billion ounces of something being rare, but the $1400 per ounce price tag definitely suggests otherwise. Gold (NYSEARCA:GLD) is definitely not rare to the top 50 producers of the world. Their current deposits and production account for over 33% of Earth's known gold; however, even at $1400+ per ounce majors like Goldcorp (NYSE:GG) and Newmont (NYSE:NEM) feel the pinch of higher costs.
In a world of rising costs and taxes for citizens, it makes sense that these gold mining companies also face similar problems. Our graphic below depicts each continent's average cash costs using the top 50 producing mines.
Cash costs represent the cost to remove an ounce of gold from the earth. It encompasses the land, labour, and plant and equipment costs required to pull 1 ounce. Heap leaching (above ground) and underground mining play a large part in the total cash cost. Heap leaching is used extensively in Nevada and other parts of North America as evidenced by the sub $600 cost. Deep underground mining is used primarily in Africa and comes with an expensive price tag of nearly $1,000 per ounce.
Recently miners have come under scrutiny for poorly illustrating their total costs of production. The World Gold Council has worked closely with companies like Barrick (NYSE:ABX) and Kinross (NYSE:KGC) to develop a method that better demonstrates the true costs to mine an ounce of gold.
The all-in sustaining cash cost represents a significantly more in-depth look at the cost to mine gold. This cost not only includes the physical costs related to removing an ounce of gold from the earth but also encompasses the General and Administrative, Exploration and Mine Rehabilitation aspects of running a mining business. Paying the Investor Relations team to fly to trade shows and speak with investors, head office rent, secretaries and capital expenditure to keep the project alive are all necessary expenses and must be accounted for in addressing the profitability of a gold miner (NYSEARCA:GDX).
Small cap producers (NYSEARCA:GDXJ) like Veris Gold (OTC:YNGFF) are really beginning to feel the pinch. Factoring in their General and Administrative costs, exploration expenses and environmental rehabilitation expenses, Veris has an all-in sustaining cost of $1628 per ounce.
To determine a floor price for gold one must forecast using the all-in costs of production, not the cash cost. Using our chart of the major producers and their all-in costs, the floor price for gold must be in the $1100 per ounce range. Below that range a supply shortage exists that will in turn cause the price of gold to rise.
Bottom line: All miners are struggling to keep costs under control in order to run a sustainable enterprise. The majority of junior miners will become unprofitable if they cannot realize gold sales of $1500+ per ounce. The major gold producers have the most impact on a potential floor price in gold, roughly $1100 per ounce.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.