COMMENT: One in 10 gold mines losing money

That's a headline guaranteed to make any gold bug sit up and take notice. What individuals think this means remains ripe for discussion.

It's no secret that the price of gold is dropping. It closed at $1,088.60 on July 22, the second lowest level since January 2010. (In February 2010 the price bottomed out at $1,058.50.) [All figures in US dollars.]

Why so low? Ideas differ. There is discussion about the United States raising interest rates in the short term. The stronger US dollar is gaining favour  by individuals and institutions. China is reportedly selling its gold reserves. Gold demand in India is not enough to pick up the slack.

Worse yet, some analysts are predicting a further fall to $1,000 per oz.

Gold producers are swaying under a mountain of debt, estimated to be more than $30 billion, a monumental rise from less than $5 billion in 2007.

Stock prices of gold miners are at their lowest levels since 2001 – and we had a global financial meltdown between then and now.

And gold production is at its highest level in history. In 2014 it was approximately 3,100 tonnes. How can than be as the price falls? Producers took advantage of the rising price that peaked at $1,875 per oz in 2011. Work to increase output, both with new and expanded projects, was initiated, those decisions pumped more ounces into the market even as the price began its long slide by the end of that year.

The all-in sustaining cost to produce an ounce of gold is a reasonable measure of how close to uneconomic some mines are. This is a far more indicative benchmark that the cash cost of production because AISC assigns more types of spending (development, exploration, sustaining capital, administration, and rehabilitation) to the total. Even AISC underestimates the all-in costs when all on- and off-site costs are considered.

The difference between AISC and all-in costs can be decreased by various cost cutting measures. Canada's gold miners have embraced paying down debt, reducing their workforces, selling non-core assets, mining higher grades, and more. The strategy has worked. Figures published by MineWeb.com in April 2015 put the 2014 average all-in cost of gold mining at $1,314 per oz, a 25% drop from the 2013 figure.

Let's take a look selected Canadian gold miners and see what their AISC were for the first quarter of 2015.

• Agnico Eagle Mines held the course with AISC of $867 per oz produced, one dollar less than the first quarter of 2014.
• Barrick Gold reported AISC of $927 per ounce in. The company benefits from significant by-product credits from its copper production, but it still warned stakeholders that AISC was expected to rise in Q2. All-in costs reached $1,024 per oz.
• Goldcorp said its AISC in was $565 per oz, significantly higher than $507 for the corresponding quarter a year earlier. All-in costs reached $1,210 per oz in Q1 2015, more than a hundred bucks below the abysmal gold price.
• Iamgold reduced its AISC to $1,113 per oz, down $23 from Q1 2014. The company is offering full year guidance of $1,075 to $1,175 per oz, so the end-year-numbers will tell the tale.
• Kinross Gold posted an AISC of $964 per AuEq oz, compared to $727 a year earlier. All-in cost per gold equivalent ounce sold was $1,054, dangerously close to the price per ounce but better than a year earlier when the same all-in cost was $1,110.
• Timmins Gold said its cash costs were $693 and its AISC was $777 per oz.
• Yamana Gold reported an AISC of $893 per oz of gold and $10.45 for silver.

Not every producer made their Q1 2015 AISC readily available. Instead, some year end 2014 numbers were to be found:

• Centerra Gold offered  and AISC of $852 per oz for the 12 months of 2014.
• New Gold put its 2014 number at $779 and offered a reduced estimate of its AISC for 2015 at $765 per oz.
• Semafo said it will cut its AISC to $730 per ounce this year from $806 last year.

AISC estimates for other gold miners were found in the most recent Timmins Gold presentation for these companies: Alamos Gold ($954/oz), AuRico Gold ($1,172/oz), B2Gold ($954), Detour Gold ($1,139/oz), Kirkland Lake Gold ($1,245/oz), Lake Shore Gold ($1,072/oz), and Primero Mining ($1,014). Timmins Gold estimated the numbers to point out its own low AISC.

Note that as the producers get smaller their AISC generally rise. Remember, too, that individual mines may have high costs but large, low cost mines or by-product credits can help keep a company in the black.

So is the one in 10 estimate of money losing gold miners accurate? Perhaps on an individual mine basis. Perhaps if all the smallest producers from around the world are taken into account.

Common sense might say that shutting down the highest cost gold mines to lower AISC and reduce supply is the way to go. But miners are not in any hurry to do that, as the price of gold depends less on the supply-demand equation than on a myriad of global socio-economic conditions.

What the future of the gold sector will be is unknown. Individuals can search the internet for any number of bloggers or authorities that will bolster their opinions, no matter what they want the answer to be.

That the gold situation will remain extremely fluid, is about all this writer can say.