Take physic, pomp

More on Ecuador’s windfall tax

After publishing the note today, I got a mail from a friend who is very wise to numbers (much wiser than me, in fact) but doesn’t follow the inner workings of mining companies very much. He said the analysis didn’t stand up because we don’t know that mining costs have risen by the same amount as gold.

Firstly, here’s the context: a chart showing the gold price in 2007 (courtesy kitco.com). The first price of the year was U$639.50, and the last was U$833.75, representing an increase of 30.37%

Thing is, the rise in costs is so well-known in mining these days that I didn’t really expand on the subject to my original audience (who were mostly miners and Ecuadorian businesspeople). But the observation from my friend was valid as my original note didn’t go into much detail about the costs rise, only mentioning the example of Barrick (ABX) to give a bit of context. So here’s a bit more.

The fact is that the ABX costs situation is repeated all over. Here are three excepts from three other 4q07 or year-end reports:

At Yanacocha (LatAm’s biggest gold mine) BVN reports:

“…For 2007, cash cost was US$356/oz, a 67% increase when compared to 2006….”

At Goldcorp (GG):

“…Gold sales for the quarter increased to 638,500 ounces at a total cash cost of $195 per ounce, compared with 599,500 ounces at a total cash cost of $160 per ounce in 2006….” (Otto’s note: 21.88% rise)

At Newmont (NEM):

Costs applicable to sales ($/ounce)
$ 406 (2007)

303 (2006)
(Otto’s note: 33.99% rise)

And so it goes on and on. Barrick, Newmont, Buenaventura and Goldcorp are some of the biggest and most established gold miners out there, so they give a good yardstick for gold cash costs. But the same is also true for junior mining companies that want to construct a new mine on their project sites. The famous one for 2007 is Galore Creek, way out in the yonders of Canada and run as a JV between Teck Cominco and Novagold. In 2006, construction costs were estimated at U$1.8Bn in a 43-101 report. Then in late 2007, that capex estimate jumped to U$5Bn, an enormous jump that spread bad kudos over the companies involved as well as the engineering company who submitted the first report, Hatch. Take a look at the 1 year chart of Novagold and take a wild guess about when the announcement was made:

But Galore Creek is not the only example. Inca Pacific’s (IPR.v) ‘Magistral’ project in northern Peru saw its estimated capex bill jump U$128m, or 48%, in the space of 10 months; U$265m being quoted by the pre-feasibility study of January 2007 and U$402m quoted in the final feasibility study of November 2007. Petaquilla Copper’s (PTC.to) project in Panama just saw capex cost estimates double to U$3.5Bn, which has cast serious doubt over whether the project should go ahead.

Again, I can spend a long while knocking out plenty of other examples of the same ilk, but the message will be the same. The price of gold does not go up all by itself and has a direct relation to the prices of other things, especially the price of things needed to get the gold out of the ground and into the marketplace. It’s straight out of the Austrian economics school playbook, in fact.

Final note; I’d normally add sources to all the data found at third partes, but as it’s a blog and not an academic or professional note, I can’t be bothered. Go look for yourself at the ABX, NEM, GG, BVN, PTC, IPR, NG websites if you like…you’ll see the same as I did, though.

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