Gold Miners' Profit Squeezed By Higher Costs

Higher gold prices have swelled revenues for gold producers, but higher costs are squeezing margins - particularly the capital costs needed to get the mines off the ground. In addition, Canadian and Australian mines are squeezed by the rise of the Canadian and Australian dollars against the greenback. Another factor raising costs is accessing lower-grade deposits previously turned down, because higher gold prices makes them profitable now.

Aaron Regent, CEO of Toronto-based Barrick Gold, said that while this impacts cash costs per ounce, it is a low-cost way of growing net asset value per share. "When it comes to looking at costs, part of what's helping us get to the nine million ounces [annually] is satellite deposits around existing infrastructure," Regent said. "These are lower grade -so they are higher-cost ounces, but the capital costs of actually developing these are really small."

Even the big seniors don't have an inexhaustible money tree, so capital conservation of some sort was inevitable. As far as gold explorers are concerned, the edge may be swinging to low-grade deposits with low capital costs. Abandoned mines are a good example of this kind of project, even if the resource base is limited. The seniors have shown little interest in taking projects like those over, giving the juniors a chance to develop on their own.