Two years ago I found a piece of research hosted by Goldmoney. It was produced by Stefan Wieler and Josh Crumb. There are a total of 4 pieces and I am concentrating on the 3rd.
If interested download each of the PDFs as it is only a summary on the website. In the research, Stefan breaks down the reliance on oil of the gold miners. Directly via diesel etc for machinery and power at a remote mine site. Also indirectly rubber for huge machinery tyres lubricants and even the need to shift humans from habitation to mining sites. The scale is important the reliance per company is different as well as different sites within the same company. It is very interesting so go and read it and all the others if interested in this space.
TLDR the report says on average "energy" cost makes up ~50% of gold production costs. Oil and oil derivatives and by-products make up the majority of this cost.
Josh Crumb always highlights the "long-dated energy to gold cost". For this, I use 5 year GC (gold) futures prices against 5 Year BZ (Brent Oil) futures prices.
The scale on the right is how many barrels of Oil will 1 Oz of gold purchase.
Orange is the long-dated price which will remove as many of the short-term volatility of market movements. If we look at the 1 year forward purple line at two points this year 1 Oz of Gold could buy 48 barrels of Oil. That is amazing for your margins if you produce gold and consume oil.
The shift from red to green on this chart is Nov 6th 2020. On that date, gold reached ~$1960. It has again reached ~$1960 earlier this week and pulled back. The gold price if I am being kind has moved "sideways", in solidarity with my gold bulls.
The oil price, however, has broken out.
This is where we have to separate the narrative "stimulus" "money printing" "Weimar" "hyperinflation" "own gold and gold miners to save you from the craziness". From the fundamental reality. Gold miners output (gold) could buy multiples of their main input (oil). Going from mid 20s to high 40s of barrels. Right now we are heading from the high 40s to 30s of barrels.
There will be a time to buy gold and gold miners again, it is just not right now. Patience is important.
@damon Assem sorry I couldn't attach a chart anything in reply to the poll.
I made this post last month. I guess the important question is do you think oil stops going up and gold stops going down.
Thank you sir for fostering a much needed debate. The CB selling gold along with a rise in gold prices was likely more than enough ammunition to keep it trading down, let’s see if oil is pivoting Back or the reflation trade will keep it kindled. The CB input though is just as crucial in its movements.
I am not sure we would be on the same side of this debate Sir. I am trying to cut through all the narrative and storytelling with simple numbers.
i Meant cb selling plus oil prices rising not gold* . trust me I’m on the fence on everything I’m just taking in all the opinions of both sides. gold is always a buy though of You have a long enough time frame so maybe it’s just timing we are differing on yea ?
Well no. Why not short it when you think it it is going down so you can buy more when you think it will go up?
"always a buy if you have a long enough timeframe" sounds like something somebody selling books about gold or someone taking "rent" on selling gold storage would say.
Which sounds just like some Wall Street guy saying "you can't time the market" what he is really saying is "I don't want you to ask for your money from my fund because we own some illiquid shit".
You are right there is a time to fuck gold and should have been shorting it since September
This is fascinating analysis and thank you for sharing.
I actually work as a mining engineer in Western Australia, and my primary experience is in underground gold mining. Certainly in an underground mining environment the equipment diesel costs, and power costs for both equipment and ventilation contribute a reasonable proportion to the underground mining cost (I would estimate between 10-20%). The power generation is largely dependent on the mine location and available power supply.
Open pit mining is the diesel usage for equipment.
The processing side would be where the highest power usage would occur, in terms of cost the processing side is not my area of expertise, but would be a very large component. Typically the processing cost will make up 25-35% of the total operating cost for underground mining for an averaged sized underground mining operation in WA (at a guess). This % would generally increase for open pit mining due to the lower operating costs, although larger production rate will offset this.
The power costs of course will be very much dependent on the power source. Due to remoteness large sites will be constructing their own power plants that are serviced by diesel, LNG, etc. so it is very much dependent on the size of processing plant, location, existing infrastructure etc. Smaller sites will simply run off multiple diesel generators.
Many sites in Australia have previously had a push to setting up solar and wind power to assist with these costs, particularly as large subsidies were also available for doing so.
The mining industry as a whole is very slow in adapting technology. Automation is increasing, and equipment technologies and productivities do improve, but it is slow compared to other industries. The use of battery powered equipment is increasing, which does reduce underground ventilation requirements (directly related to diesel emissions), however these batteries still need to be charged.
I would imagine that the processing side of things would hold a decent potential for power reduction, but the reality is that crushing and processing rock takes a lot of energy.
Cheers.
Glad you found it useful. Thank you for adding your real-world experience. I am just a dude with charts sat at the kitchen table trying not to kill my kids during lockdown homeschooling :)
Hahaha i feel ya man, that ain't easy!
It's just interesting how the people in my office (myself included) would know the role of power costs in gold mining, but never think to apply it in this particular way!
I will send you my account details, if you could just deposit 10% of any gains/savings garnered by this analysis I would be most grateful.