Josh Wolfson, Vice President, Senior Mining Analyst at Dundee Capital Markets did an excellent presentation at PDAC on the topic “Observations with Respect to Grade in the Gold Mining Industry”. Mr. Wolfson hit on the topics of grade trends, grade economics, as well as provided case studies on the impact of grades on valuation.
The study used data from 153 mines from 23 public companies. Ouput by company ranged from <200,000 to 5 companies over 2 million ounces. Mine type varied from open pit, heap leach, to a combination of the two.
In the last 9 years the reserve pricing used for 5 senior producers has gone from $365/oz to $1,200 ounce (+230%) while the gold price has only increased 184%. Mr. Wolfson found in the last 10 years the average reserve grade has decreased by 35%. Underground mines have had a huge drop from 8 g/t to the current level of 1.5 g/t.
*source Dundee Capital Markets/Company reports
Production grade has declined in the last decade by 31% when you look at all mines (open pit, underground, and combined) from just under 2 g/t in 2005 to the 1.30 level in 2015.
Research from Mr. Wilson shows that miners are processing (production grade) higher grade material than reserve grade shows. The numbers show processed grade is 17% higher than reserve grade on the mines used in the study.
Four possible factors for this reserve-production grade variance are given.
- Changing economic assumptions for reserve calculation, which has resulted in lower grade reserves as gold prices have increased.
- For weighted average calculations, increasing proportion of open pit industry reserves delineated.
- Motivation to maximize NPV and improve payback by processing higher grade ore earlier in the mine plan (high grading).
- Influence of new mines, which demonstrate greater variance in early years.
It is no secret that the cost of producing gold has had a dramatic rise in the last decade. Dundee’s work shows median costs have increased 49% in the last five years from $621/oz to $928/oz in 2014.
Where did this come from?
Factors influencing costs include recovery,grade,opex,royalty,capex, and prices.
In the previous 5 years Dundee estimates grade was the second most factor accounting for cost inflation accounting for a $63 increase per ounce (20%). Operating expenditures (opex) lead the way at $178.
The research wrapped up with a case study that shows miner changes in grade can have a sizeable impact on costs and therefore valuation of a mining company (NPV).
* Research by Dundee Capital Markets
My thoughts was this research was fantastic. It shows gold is getting harder and harder to find. High grade sizeable deposits (+3 million ounces) have not been discovered in recent years. If the ore grade continues to decline costs will continue to go up. A higher gold price is/will be needed to mine this lower grade material in the future.