Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Coeur d’Alene Mines Corporation (CDE), Allied Nevada Gold Corp. (ANV): Cost Inflation a Big Problem Globally – Stay Local

It’s well known that the gold majors are suffering from elevated all-in costs after years of reckless expansion into high risk countries and exploration overkill. Over the past six months, silver, gold, copper and platinum prices are down 35% and 23%, 14% and 12% respectively. Over the same period, oil prices are up 8%. Mining cost inflation is as big a problem as weak demand and resource nationalism.

Coeur d'Alene Mines Corporation (NYSE:CDE)

Typically When Commodity Prices Fall, Mining Costs Fall

Since demand for commodities is tied to global growth, when prices fall, the cost of mining typically falls. However, in the past several years this has not been the case. In addition to oil prices, (as a proxy for diesel costs), labor, materials and power costs, (per unit of production) have increased or stayed the same. Margins are under severe pressure.

Hard to Meaningfully Improve a High-Cost Mine

In many cases, mines in the fourth-quartile of the cost curve were designed with much higher commodity price expectations. Commodity prices soared twice in the past five years, in 2008 and 2011. For example, gold prices touched $1,920 per ounce in September 2011, compared to $1,275 per ounce today.

As the majors retrench, less new gold supply will support and eventually lead to an increase in prices. The beneficiaries of higher prices will be high-quality, mid-tier and junior companies with low-cost operations and simple, clean business models. Make no mistake, hundreds of gold companies will fail in the coming years, but the strongest will thrive.

Producers in Safe Jurisdictions Will Be Especially Sought After

There have been many recent articles about the growing challenges of, “resource nationalism.” In addition to causing significant challenges on multiple fronts, acts of resource nationalism cost companies a great deal of money. The majors have learned this the hard way. Barrick Gold Corporation (USA) (NYSE:ABX) has reportedly spent several billion dollars on a $9 billion gold/silver mine in Chile that’s now on indefinite hold. There’s a real possibility that the Pascua-Lama project will never make it into production.

Likewise, Newmont Mining Corp (NYSE:NEM)’s $5 billion gold/copper project in Peru is being aggressively opposed by thousands of locals who fear the mine will damage the water balance in the region. This, even after Newmont Mining Corp (NYSE:NEM) has taken significant, proactive steps to alleviate any possible threat to the water supply. Dealing with resource nationalism is a rapidly growing cost of doing business.

While Not Immune From Cost Pressures, U.S. Mining Projects Are Superior

Key costs that are killing projects in places like Africa and central Asia are simply not meaningful factors in the U.S. For example, resource nationalism is not a threat in Nevada. The U.S. has well established, low-cost and reliable infrastructure, wage rates are relatively stable, and tax and royalty regimes are benign. These factors make the U.S. a low-risk jurisdiction to operate in. Therefore, the cost of project capital is lower.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.