Gold mining operations have been under severe pressure for years, and major companies have burnt through $11 billion in the last decade, but that hasn’t stopped mines from increasing production, raising the gold supply by 10% between 2009 and 2012. Normally you would expect cost pressures to force some mines to halt production, but Citi analyst Jon Bergtheil thinks that cash costs may be a better indicator of short-term pressure than all-in costs.

Gold miners failed to cut costs

“Gold miners have failed to cut costs quickly enough to keep up with the fall in the gold price. Indeed, Citi equity analysts calculate that average all-in costs production costs decreased by 6.1% y/y in H1 2013 to $1,666/oz, while average spot gold prices fell at a faster rate of 7.4% to $1,530/oz. during the same period,” writes Bergtheil. “We estimate that practically the entire global gold industry is cash-burning on an ‘all-in’ cost basis.”

gold all in costs

Gold: All-in cost

All-in costs include everything from CAPEX and exploration costs to taxes, but a lot of the time these costs are overhead that mining operations can’t get out from even if they halt operations. This is the comparison that has a lot of people worried about the industry. Looking only at cash costs, a more reasonable picture emerges.

gold cash costs

This doesn’t mean that all-in costs aren’t relevant, and they’re still a good indication of the long-term health of the sector, but cash costs seem to be a better indicator of gold production in the short term. This implies that gold’s spot price will have to keep falling before miners start pulling back on supply, and while Bergtheil doesn’t think gold will fall below $1000/oz, he concedes that it is a possibility. Above ground inventory has also been increasing, meaning that even if miners do reduce production there will be a significant delay before the reduction is able to support prices.

Something unexpected could always send investors back to gold as a defensive measure, but with falling prices and a still increasing supply, it looks like gold’s bear market hasn’t completely played itself out just yet, causing Citi to rate the sector as a whole as neutral.