RE: Back to Gold19 Mar 2020 19:45
Gold Mining Reserves Set to Shrink
Wednesday, 10/02/2013 20:29
Mining reserves in the ground are set to shrink thanks to lower gold prices...
GOLD MINING RESERVES owned in the ground are naturally assumed to be a fixed number of ounces, says Jeff Clark at Casey Research.
After all, gold doesn't decay, and neither does it grow legs and move someplace else.
But assumptions are dangerous. In fact, industry-wide, gold mining reserves are likely to fall fairly significantly in the near future.
When the gold price falls, it doesn't just have a short-term impact on producers through slashed earnings and forced write-downs. It can affect the number of economically mineable ounces a company carries on its books, or even what it can mine in the future.
Gold mining reserves are determined by a combination of factors: mostly cut-off grades, metals price assumptions, and projected production costs. For example, based on a gold price of $1500 per ounce, a project may have economic ore at a cutoff grade of 1 gram per tonne (g/t). But with gold selling in the low $1300s, that same deposit may now require a higher cutoff grade, say 1.5 g/t, because the revenue earned from mining ore at the previous cutoff would be lower than the cost to extract it – a strategy that, as we all know, doesn't make a great business plan.
Higher cutoff grades reduce the number of economic ounces available for mining, especially if the gold price doesn't recover for a period of time.
As you can see, that's a fairly significant drop, and it has undoubtedly forced many company executives to revisit the price assumptions that were used to determine reserves. That means many reserves requiring a gold price of $1350 per ounce or higher are likely to come off the books.
This is the reason high-grade projects have better odds of survival than low-grade ones. Sure, all projects make less money when gold falls, but the higher-grade ones tend to have higher margins and see fewer slowdowns or shutdowns. In many cases, they still make great profits.
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