In Part 1 of this article series we used our Mine Plan Radar Tool to plot over 40 of the world’s gold mining operations according to their all-in sustaining cost (AISC) and total reserves (discounted for recovery and by the time-value of when the reserves will be produced). In this depiction (see below) the greater a mine’s go-forward NPV, the closer it will be to the axes origin in the lower-left corner of the chart.
And while more NPV is better (all else being equal) this calculation is only meaningful relative to the cost of acquiring the operation in the first place or the price for which it could be sold. So in this article (Part 2 of 3) we have segmented the landscape into four quadrants each with a distinct ownership philosophy and set of implications for operational improvement.
The 4 quadrants and their apparent ownership philosophies are defined as follows:
1. Blue-Chip Plays (AISC: ~$450, Discounted Reserves: ~4500 thou. Oz., NPV: ~$3.8B): These are the operations with both large reserves and low costs. They are desirable to own because they represent a large opportunity to deploy capital in an operation that is highly profitable on a per ounce basis. Given their large scale, all aspects of performance will warrant close scrutiny and operational improvements to reduce AISC will be worth a lot. As part of a global miner’s portfolio, reducing the AISC of this operation will have a large impact on the organization’s overall AISC because of the large production volume. However, operational improvements to reduce AISC will not be strictly required to proliferate the mine’s operation as its profitability will be robust even at a low gold price.
2. Safe Plays (AISC: ~$450, Discounted Reserves: ~2100 thou. Oz., NPV: ~$1.8B): These are the operations with smaller than average reserves and low costs. We have dubbed them “safe” because they represent modestly sized investments (relative to Blue-Chip operations) which will remain profitable at a wide range of gold prices. For these operations, operational improvements to reduce AISC may open the door to increasing the amount of reserves that can be profitably mined, thereby increasing the value of the operation.
3. Small Upside Plays (AISC: ~$900, Discounted Reserves: ~2100 thou. Oz., NPV: ~$0.8B): These are the operations with smaller than average reserves and higher than average costs. We’ve dubbed them “upside plays” because they have the opportunity to increase their NPV by a large proportion when the metal price rises. However, they also carry the risk of becoming unprofitable when the metal price falls. For these operations, reducing AISC will allow them to withstand more challenging price environments until their upside potential can be realized.
4. Large Upside Plays (AISC: ~$900, Discounted Reserves: ~4500 thou. Oz., NPV: ~$1.8B): These are the operations with larger than average reserves and higher than average costs. They have similar NPV to Safe Plays but theirs is based on production volume rather than profitability. Like Small Upside Plays they have the potential to increase in NPV by a large proportion when the metal price appreciates and efforts to reduce AISC are critical to making them more resilient during challenging price environments.
The table below summarizes the 4 types of operations along with the main driver for operational improvements to reduce AISC:
In Part 3 of this article series we explore how dramatic shifts in the gold price will affect the value of each type of operation, along with the implications for ownership philosophy and operational improvements to reduce AISC.
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