Chinese Gold cash costs: The Golden dragon

CHINA October 28 2013 10:44 AM
 
BEIJING (Scrap Register): Like an elusive golden dragon, gold cash costs in China are largely absent from most global cash cost analyses, said Barclays capital in a research note.

“We estimate that average global cash costs (ex-China) rose by 13.1% y/y between 2011 and 2012, and according to our initial analysis, costs in China have also increased, though so far in 2013, the trend is not so clear,” Barclays added.

According to Barclays, cash costs in China are, on average, lower than global cash costs. In 2012, the average cash cost in China was $549/oz, versus $673/oz ex-China (Barclays estimates). Similarly, we estimate total cash costs ex-China at roughly around the $1,000/oz level, while in China they averaged $660 in 2012, implying sustaining capital expenditures of around $112/oz, below the $200/oz estimate we use for mines outside China.

Using the data available (covering 11% of Chinese mine production), the weighted average cash cost of $549/oz would place China around the 27th percentile of our 2012 global cost curve, near the lower quartile. That said, costs almost certainly rose in 2012. One miner, Zijin Mining, said its unit cost of sales had risen by around 40% y/y, mainly on increases in labour and energy costs – an issue also experienced elsewhere, they added.

Using data from Zijin, labour costs in China are roughly twice energy costs (which comprise 7% of unit cost of sales), versus triple at some South African producers (which have a 49%/15% labour/energy cash cost split). Eldorado’s Chinese mines and China Gold International’s mine both saw cash costs rise last year, but, according to preliminary data for 2013, average costs have remained relatively flat, with some producers experiencing higher costs and others successfully implementing cost-control strategies.

At Zijin, the Q1 13 (the latest available) unit cost of mined gold rose by 9% q/q and 44% y/y, while at China Gold International and Eldorado, total production costs rose by less than 1% q/q and fell or remained flat y/y, respectively.

In Q2 13, China Gold International’s average cash costs fell 9.6% q/q and 3% y/y, while its total cash costs fell 8% q/q and rose 2% y/y. Similarly, at Eldorado, Q2 13 cash costs and total cash costs both fell 1% q/q and rose 2% y/y. On the whole, although cash costs in China could rise, we do not expect upward pressure to be of the same magnitude as in countries like South Africa.

“Given that we expect global cash costs this year to rise by around the 3% q/q average of the past few years, China looks likely to remain a low-cost producer in a global context, at least in the medium term,” Barclays concluded.