Gold: Cost of Production

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The CEO of AngloGold Ashanti surprised even Joe Kernen this morning with his comment that it cost “more than $1000 an ounce across the industry to produce an ounce of gold.” Surprised me, too so I did a little research.

John Doody, founder of the newsletter “Gold Stock Analyst” broke down the cost per ounce for AngloGold Ashanti in Q3, 2010:

Cash cost: $643

Depreciation: $157

Other costs: $166

Total: $966 per ounce

“Other costs” include exploration, management, taxes, interest—$166 was the cost in the third quarter of 2010 and John says, “Mark (Cutifani) knows what they are forecasting for 2011, $1,000/oz is probably a good number”.

The industry average cash cost he says was $542 per ounce in 2010 plus all the other costs or, about $100 an ounce less than AngloGold. Even with gold near $1400 an ounce, margins are still tight.

What are the highest cost mines? John says Harmony Gold and DRDGold, both South African mines, with cash costs of about $1,000 per ounce, plus the other costs.

Lowest cost mines? Gold Resource is projecting cash cost of “zero” in 2011 on production of 90,000 ounces. And Yamana Gold, which John says produced over 1 million ounces in 2010 at a cash cost of $102 per ounce making it the lowest cost, large producer.

Both Gold Resource and Yamana get their low cash costs due to big by-product credits loosely defined…as income from metal production other than gold.

So, while the AngloGold Ashanti CEO is patting himself on the back for taking off its forward hedge book, maybe its time to consider some downside protection and get long gold "puts".


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