The gold industry has been built on the leveraging of debt and energy. The days of using human and animal labor to produce the precious yellow metal are long gone. While some gold is still mined the old fashion way, the overwhelming majority is produced by using colossal-sized mining equipment, massive amounts of capital, energy, and materials. Thus, the global gold supply comes via a very complex industry with a lot of moving parts. When one of these critical parts are in short supply or removed, then the entire gold supply system disintegrates.
An example of one of the newest complex gold mines in the world is the Pueblo Viejo Mine in the Dominican Republic, owned by Barrick (60%) and Goldcorp (40%), which cost a staggering $3.7 billion to build. The Pueblo Viejo Mine started production in 2013 and is now running a full capacity.Gold production at the Pueblo Viejo Mine is over one million ounces per year. According to Barrick, it’s cost of sales at Pueblo Viejo was $564 an ounce in 2016. However, cost of sales does not include “all costs.”We must also factor General and Administrative, Exploration-Evaluation, Mine Closure and Income Tax expenses.
However, these additional expenses do not include the initial $3.7 billion cost to build the mine. According to data, the Pueblo Viejo Mine has approximately 15.5 million oz (Moz) of proven and probable gold reserves. Even though additional gold discoveries at the mine will be added in the future, if we assume a 15-year initial payback period, the annualized capital cost would be an extra $250 per oz of gold produced.
Thus, the $564 cost of sales plus $250 capital cost now equals $814 an ounce. But, this does not include the additional expenses which would push the actual total cost from the Pueblo Viejo Mine over $900 an ounce. This is just my simple calculation which shouldn’t be compared to the industry’s more complex accounting of Net Present Value.Even though the Pueblo Viejo Mine is Barrick’s lowest cost gold mine in the company, Barrick’s total cost to produce gold last year was $1,125, based on the $1,251 spot price.Again, that is my simple “Net Income Break-Even Analysis.”
Regardless, the Pueblo Viejo Mine is a very advanced complex mine that processed 7.5 million tons of ore to produce the 1.1 Moz of gold last year. According to Barrick’s 2016 Sustainability Report, the Pueblo Viejo Mine consumed the following in 2016:
Pueblo Viejo Mine Materials & Energy Consumed:
