The Basic Economics Of Gold Mining

The potential profits from extraction industries such as mining, oil production and gas production are different than for manufacturing, retail and wholesale sales, and service vendors. The extraction industries focus on recovering assets from a site that will eventually be economically depleted. In contrast, other industries normally are able to operate indefinitely.

As a result, those operating a gold mine (or any other mine producing precious or non-precious metals) need to be able to recover full costs of exploration, discovery, financing, regulatory and environmental compliance, infrastructure development, the actual extraction of the metal, processing, transportation and sales as well as a hoped-for profit. In many instances, a potential mine site may be discovered, but the expected yield of recovered minerals is not sufficient to cover all of these costs and leave room for enough profit to make it worthwhile to actually go ahead and develop a mine.

In some instances, especially if prices rise after a mine goes into production, larger than normal profits can be earned.

But, a key focus of planning and operating a mine site is that it will only operate for a limited time. Once all of the economically recoverable metal has been extracted, the operation will shut down.

As technology has advanced, it has become possible to become more efficient at mining gold. It might become possible to dig further underground or to work smaller veins than in the past. This has enabled some mines to continue output long beyond the original forecast.

However, at any point in time, a mine only contains a finite quantity of recoverable metal at current price levels. As mining technology becomes more efficient, the yield of gold per ton of ore inevitably declines.

Even in the most productive mines, gold is rare. A better-quality underground gold mine might yield 8-10 grams of gold per ton of ore that is extracted. Marginal underground mines may only yield 4-6 grams of gold per ton of ore. Open pit mines, which have lower infrastructure costs, may be profitable with a yield of just 1-4 grams of gold per ton of ore.

As any specific mine is depleted of recoverable gold, the company operating this mine has an incentive to discover new sites to develop or to buy exploration companies that have already made the discoveries but don’t have the financing to develop the mine sites.

A time of rising gold prices has been the major spark in expanding gold production over the past half century. After the price of gold peaked over $800 in January 1980, there was a significant expansion of gold mining operations throughout the 1980s into the early 1990s. Production peaked around the turn of the century, where lower gold prices resulted in falling gold mine output through 2008.

As prices started to rise after 2008, so did global gold mine output, which peaked in 2019. As prices have stagnated over the past two years, gold mine production has been declining. The gold reserves (economically recoverable metal at current prices) of the world’s 10 largest mining companies combined are now about 1/3 lower than they were 15 years ago.

The mining industry in general is experiencing a greater backlash today over environmental concerns than in years past ­– except for the metals needed to manufacture solar panels and wind turbines. That makes it even riskier to continue to continue seeking new sites to develop into productive gold mines. Times of declining gold production over the past half century have been followed by periods of higher prices. Therefore, the current drop in gold mine output may signal significantly higher prices in the coming years, no matter what other factors impact the gold market.