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The average production cost of gold mines rose 18% last year to $1,276 per troy ounce. This surpassed the old record set in 2012 by $160 per troy ounce. This is what the World Gold Council writes on the basis of New figures about the gold mining sector. Global production costs rose mainly due to higher energy prices, but the drilling of new gold veins with a relatively low quality of gold ore also pushed up average costs. What does this mean for the gold market and the mining sector?
The production costs of gold mines are usually lagging behind the development of the Gold price at. If the price of the precious metal rises, it becomes lucrative to increase production and tap into lower-quality gold reserves. If the gold price falls, we see that mines again concentrate on the most high-quality reserves and leave relatively expensive reserves behind. Last year, the price of gold skyrocketed due to Russia's invasion of Ukraine, making it lucrative for mines to further scale up production. Despite higher costs, profit margins remained very attractive.
Another effect of the war was the rise in energy prices. Worldwide, fuels became considerably more expensive, on the one hand due to the higher oil price and on the other hand due to Western sanctions on Russian oil. These high fuel prices have also contributed to higher production costs for the gold mines in 2022, as many machines are needed to mine and refine gold. On average, gold mines extract about one to two grams of pure gold from a thousand kilos of rubble. To create a Troy Ounce Gold Mines therefore have to process a lot of gold ore. This requires not only machines, but also explosive material and cyanide. They also rose in price last year.
The World Gold Council notes that the production costs of Russian gold mines have risen proportionately even more, by 28% to $1,018 per troy ounce. Still lower than the global average, but relatively speaking, a larger increase. For the gold mining sector of Russia, costs increased mainly in terms of logistics and overhead, as the sanctions made it more difficult to sell gold. Until before the war, Russia exported a significant part of its production to the United Kingdom, where several major gold ETFs hold their physical stocks. With a gold mine production of 330 tonnes per year is Russia almost the largest producer in the world. Only China extracts a few more tons of gold from the ground on an annual basis.
Gold mining production costs rose sharply in 2022 (Source: World Gold Council)
On the positive side for the gold mining sector, production costs levelled off somewhat in the course of 2022. In the fourth quarter, the so-called all in sustaining cash costs (AISC), which includes indirect production costs and exploration costs, by 0.9% compared to the third quarter. This decrease was partly due to a higher average ore grade and a decrease in fuel costs. Due to high inflation, gold mines may also have to deal with rising personnel costs this year.
Production costs decreased again in the fourth quarter (Source: World Gold Council)
Whether production costs will continue to rise or fall in the medium term is largely determined by the price of gold. If it rises further, this will also justify higher production costs. At the current gold price of $2,040 per troy ounce, about 90% of all gold mining production in the world is profitable. If the price remains at this level or rises further, it will encourage the sector to further increase production. But past experience shows that it is at most a few percent on an annual basis, because all the easily extractable gold has already been excavated. The total supply of the precious metal will therefore remain scarce, even at higher prices.
Cost curve global gold mine production (Source: World Gold Council)
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