Another argument (for what we began laying out in Part One of this article) is that gold producers are still making a margin, even at current levels.
Back to Reuters, which quoted metals consultancy GFMS’ estimates that producers’ average cash costs rose to a new high of $727 an ounce in the first half of 2012, up 19 percent year-on-year.
The average all-in cost of production was estimated to have risen to $1,050 an ounce.
Rising wage bills, energy costs and falling ore grades are mostly to blame, although it is said some miners switched to lower ore grades as prices rose and have the ability to switch back to slightly richer seams as prices fall, maintaining an internal cost-adjustment mechanism.
If that is the case, costs per ounce may not rise so fast now that we have a lower market price environment.
Those silver miners that chose to hedge apparently used options, rather than selling their future production at fixed prices and exposing themselves to painful margin calls if prices kept rising. Under a typical “collar” option strategy, the miners guaranteed a minimum price for their metal in exchange for capping the potential gains if prices rose dramatically.
The exception among gold miners appears to be Peter Hambro’s Petropavlovsk, the mid-cap gold miner with a focus on Russia, which hedged just under half its production earlier this year at a price of $1,663 a troy ounce – well above current prices of $1,350. The firm explained that its high gearing (debt levels) and committed capex meant it made sense to guarantee income in a volatile market.
So if this works for silver producers and for Petropavlovsk (and show me a miner of any metal who doesn’t have high debt levels and a committed capex program), why aren’t more miners of, say, base metals doing the same?
Well, it seems a few of them are.
Nyrstar, the world’s largest zinc producer, last month announced it had guaranteed minimum zinc prices of $2,100 a metric ton for the rest of the year for some 60% of its mined zinc output; late last week, 3-month zinc was trading at $1,873.
It’s possible that some others may have done the same; often it comes out in annual reports rather than miners making a song and dance about it at the time. For any that haven’t – and that’s probably the majority – they have likely missed the boat.