Mining Trends Shaping Precious Metal Markets

KEY TAKEAWAYS

• The main methods of mining gold and silver are underground and open-pit mining. 
• Some potentially valuable deposits of these precious metals will never be mined due to local jurisdiction laws around the use of cyanide.
• Some mining companies are developing renewable energy sources and electric vehicles to replace diesel-fuel vehicles and equipment. 
• Mining stocks are undervalued relative to the fundamental factors that drive the price of gold and silver.

This article will explore the economic and political factors influencing the current trends in the precious metals mining industry. This includes examining key variables including mining methods, cost factors, environmental factors and political risk considerations. 

Precious Metals Mining and Extraction

The two main methods of mining gold and silver are underground and open-pit. Underground mines are more expensive and are used to reach deeper deposits. 

Open-pit mining is used for near-surface mineral deposits. While less expensive to develop and mine the ore, open-pit mines are typically much lower grade than underground mines and thus less profitable over the life of the mine. Many mines around the world are a combination of both open-pit and underground. 

The method of extracting the mineral from the host rock depends on several factors and the process used is determined by metallurgical study and analysis. Cyanide is one of the main substances used for gold and silver extraction as part of mineral extraction processes that use various leaching techniques. 

Some potentially valuable gold and silver deposits will never be mined because of the local restrictions around the use of cyanide (for instance the Chubut Province, Argentina). The cost of extraction varies based on the type of processing and extraction technique applied. 

Since most of the easy-to-find, near-surface gold and silver deposits have already been discovered and mined, over the last 30 years it has become harder and more expensive to find profitable mineral deposits. 

A typical open-pit gold deposit globally contains one to two grams of gold mineralisation per tonne of rock mined. For example, Barrick Gold (the second largest gold producer in the world) uses between 2 tonnes and 91 tonnes of rock to produce just one ounce of gold!

Emerging Trends in the Mining Industry

The „green” movement has presented environmental and cost challenges to the mining industry. In addition to the use of cyanide, mining is energy (electricity, fossil fuels) intensive with the cost of energy representing 50% of the cost of mining. 

Some mining companies are working on developing renewable energy sources and electric vehicles are starting to replace diesel-fuel vehicles and equipment. 

Aside from political jurisdiction and environmental challenges, the cost to build and operate a mine is the most important aspect in determining whether to convert a mine project into an operating mine.

Political and Environmental Factors in Mining

Political and environmental considerations are important factors in the cost of a mine. Some countries are more mining-friendly than others. In general, Canada, the United States, Australia and some countries in South America and Eastern Europe tend to be the most politically and socially amenable places to develop, permit and operate a mine. 

However, West Africa, which is now the second-largest gold-producing region in the world, has emerged as one of the most politically viable and lowest-cost areas in the world to mine gold. Fortuna Silver demonstrated this when it built its Seguela Mine in Cote d’Ivoire in roughly 18 months. Seeing it for myself, it is now one of the lowest-cost gold mines in the world with an all-in sustaining cost of $788 per ounce as of the end of Q3 2023. 

While Seguela has one of the lowest all-in sustaining costs (AISC) per ounce to mine gold, according to S&P Global the average AISC in 2023 for the 15 largest miners was $1,289 per ounce. Meanwhile, the Silver Institute’s interim 2023 report showed that the AISC for silver miners averaged $17 per ounce. 

The AISC includes the cash cost of mining at each mine plus the „sustaining” costs, which include non-operating costs at the mine level like sustaining capital expenditures, mine-site exploration expenditures and a few other ongoing expenses related to a mine operation.

The Impact of Mining On Gold and Silver Prices

Understanding the cost per ounce to mine gold and silver concerning the market prices of gold and silver leads to the discussion of whether or not mine production and the associated costs can influence the prices of gold and silver. In other words, do mining companies command pricing power for their product?

The short answer is „no.”  

However, the cost to find and bring to production new gold and silver deposits has gone up considerably over the last 30 years. This affects both supply and the willingness to operate a mine unless the market price is above the all-in cost to find and mine deposits. To some degree, this has helped push the prices of gold and silver higher since 2001. 

That said, regardless of the AISC of mining gold and silver, precious metals producers are at the mercy of the market. Supply and demand factors into market price discovery – with the discussion of price intervention aside. The business model of a mining company is to produce gold or silver at an AISC below the market price. As such, mining companies thus do not have the ability or desire to influence the market price by holding back production unless the market price realised is below the cost to produce.

The factors that determine the price realised by miners are out of the control of the mining companies. In the extreme, if the market price of gold or silver falls below the average AISC, some mining companies will pause production at mines that would be unprofitable. However, it’s not clear that withholding of supply affects the market price of each metal. To summarise, mining companies do not have pricing power for their product. They have to accept the market price and sell at that price regardless of the AISC. 

That said, in a recent conversation with Jim Hesketh (CEO of Viva Gold), he explained that mining companies are at the mercy of the market but there’s a „sweet spot”. In every bull cycle, the spread between the AISC and the market price of gold and silver generates massive profits for precious metals mining companies. In these windows of opportunity, gold and silver mining is extraordinarily profitable.

Insights for Precious Metal Investors 

Mining stocks are extraordinarily undervalued relative to the fundamental factors that drive the price of both precious metals. 

Currently, the average all-in-sustaining cost per ounce for both gold and silver producers is below the AISC. If there’s a big move higher in the prices of gold and silver, which is a strong possibility given the fundamentals that affect precious metals prices, the mining stocks will soar.

Dave Kranzler is a hedge fund manager, precious metals analyst and author. After years of trading expertise build-up on Wall Street, Dave now co-manages a Denver-based, precious metals and mining stock investment fund.

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