Midway through his master's degree in geology in the 1980s, Brian Christie trekked to the Red Lake gold mine in Northwestern Ontario as part of a research project. About 930 metres deep, more than one and a half times the CN Tower's height, the remote mining project was a treat for a geology student eager to make his mark in the industry.
At the time, Red Lake was near the top of the list of the world's most important gold mines in terms of grade and volume. Even today, after decades of production, some areas of the mine produce 57 grams of the gold per tonne – many multiples ahead of the industry average.
Yet the enthusiasm for projects such as Red Lake has been undercut by a 10-month slide in gold prices and at least $23-billion worth of writedowns by Canadian gold miners over the past year and a half.
Today, Red Lake's high-grade gold is found as far down as 2,350 metres, about four times the CN Tower's height, which shows the difficulty gold miners face in trying to boost their stock valuations even if prices for the precious metal rebound. The deeper a mine, the longer its ramps and shafts must be, and the more energy required, to transport gold to the surface. "Obviously, your costs are going up," said Mr. Christie, now a vice-president at Agnico Eagle Mines Ltd.
As bullion soared to $1,900 (U.S.) an ounce, few people cared about expenses. But after the sudden sell-off this spring, investors are panicking.
With bullion now at $1,313 an ounce, Barrick Gold Corp. trades for just $17.42 a share, a level last seen in 1993. The gold price then: $330 per ounce. Using gold prices to gauge the prospects for miners of the commodity has become more difficult because cost inflation and the industry's reliance on low-grade projects have wreaked havoc on the companies' balance sheets.
Because much of the world's top-notch ore has already been unearthed, miners have resorted to developing much less profitable projects. Canada's Iamgold Corp., for one, currently operates two mines in West Africa and Suriname, and the average grade across both is just one gram of gold per tonne.
At this level, much more dirt must be dug up and processed to produce one ounce of gold. "There's no substitute for grade," Steve Letwin, Iamgold's chief executive officer, said in an interview, adding that his company now has no option but "to become excellent at what we do."
Iamgold is not alone. In the decade from 2001 to 2011, the weighted-average grade of gold produced globally fell by more than a quarter, to just 1.5 grams per tonne from over 2 grams, according to the SNL Metals Economics Group. And over the past 15 years, 40 per cent of all gold discovered has come with an average grade of 0.7 grams per tonne.
Such levels aren't problematic for every mine, Mr. Christie said, especially in places like Mexico where the climate accommodates year-round production. Problems arise, however, "when you're trying to mine a one-gram deposit in the middle of Val-d'Or and you've got -30, -40 [degree] weather conditions to contend with."
Still, warmer climates can't always justify expensive projects, particularly when they require billions of development expenses. Barrick's Pascua-Lama project and Kinross Gold Corp.'s Tasiast mine are both lower grade, and their owners recently announced writeoffs amounting to $10-billion combined because they no longer make as much economic sense.
Such impairment charges stem from the trifecta of falling gold prices, lower grade ore and a slew of higher costs. On top of capital spending, labour, for one, is now more pricey because other mining companies and oil sands giants are trying to attract top geologists and engineers.
Near the height of the mining supercycle in 2011, PricewaterhouseCoopers and Coopers Consulting pointed out that mining engineering grads made an average of $70,000 a year fresh out of school, and that over 80 per cent of mining positions had become eligible for corporate incentives such as cash bonuses and share purchase plans, up from 59 per cent in 2002.
Given these outlays, Nick Holland, chief executive officer of South Africa's Gold Fields Ltd. urged his peers last year to "stop kidding ourselves" by reporting costs of just $500 an ounce. Many major gold miners have since started reporting what they call their 'all-in' cost of production. Last quarter, Barrick's amounted to $919 an ounce, while Kinross's totalled $1,072 an ounce and Goldcorp Inc.'s hit $1,279 an ounce.
At $1,300 gold, these costs don't leave room for much profit, so big names like Barrick and Australia's Newcrest Mining Ltd. have embarked on campaigns to either sell or scale back their highest cost development and exploration projects. These moves address short-term solvency issues, but leave open questions about the long-term prospects for gold mining shares.
"When you stop exploring, you're leaving one alternative for growth when the [gold] price rebounds," Mr. Letwin said, referring to acquisitions. In years past, this dynamic led to the mega-acquisition blunders that miners are reeling from today.
George Topping, mining analyst at Stifel Nicolaus, agrees with the theory, but he stressed that the prospect of new deals shouldn't be so scary. "The days of buying the 10-million ounce deposit that costs $2-billion to develop, that's gone for a while," he said.
"For the next year or two, any acquisitions will be of mines that are already in production, or that have small capital expenditures, or are higher grade."