Friday, September 5, 2014

Depletion: the problem with gold

Depletion is the true elephant in the living room of our age: it is a gigantic problem but it is rarely - if ever - recognized. Few people understand that depletion does NOT mean that we run out of anything. It means that producing a mineral commodity becomes so expensive that fewer and fewer people can afford it. It is happening with all mineral resources and, in this post, Steven Rocco reports about the situation in the gold mining industry. Clearly, we are not running out of gold, but with the cost of fuel increasing by a factor of five in ten years, you can't but wonder how the gold industry will be able to maintain the present production rates. (UB)

From the blog "SRSrocco Report", reproduced by permission of the author

GOLD MINING INDUSTRY: Fuel Costs Explode Over The Past Decade

 By on August 4, 2014 
The gold mining industry literally devours energy to produce an ounce of gold.  In the past decade, fuel consumption at the top gold miners more than doubled, but the actual energy cost grew at a much higher rate.

The huge increase of diesel consumption at the top 5 gold miners is due to several factors.  As ore grades continue to decline, the gold mining companies need to extract more ore to produce the same amount of gold.  Thus, the massive haul trucks that transport this ore burn more diesel in the process.
Furthermore, as open-pit mines age, they deepen which forces the haul trucks to travel longer distances at a higher grade.  One of the largest haul trucks in the world is the Caterpiller 797F.  These haul trucks are massive and can transport 400 metric tons of ore in a single trip.

CAT 797 pic

The CAT 797F has a standard 1,000 gallon tank and has options for a 1,500 and 2,000 gallon tank.  The graphic below (from the Engineering Network) provides some of the costs and statistics of the CAT 797:

CAT 797F

The CAT 797F costs $5 million a pop and uses six tires that cost $42,500 a piece.  Here is a fascinating cost factor that I found quite surprising.  According to an article in the Engineering and Mining Journal:

studies show tire costs can exceed 25% of total haul-truck operating costs per ton; and total tire service and replacement costs over the useful service life of a haul truck can exceed the original purchase price of the truck.
Basically, tires cost just as much or more than the haul truck itself.  That is an amazing statistic that just goes to show how expensive it is to mine gold.
In addition, you will notice the CAT 797F has an excellent fuel consumption rating of 0.3 miles per gallon…. which is a little more than 3 gallons per mile.  To get an idea of how much more diesel the gold mining industry consumes today, let’s look at the following chart.

Diesel consumption per ounce of gold produced more than doubled from 12.7 gallons per ounce in 2005 to 25.8 gallons per ounce in 2013.  You will notice that the diesel figures for 2012 and 2013 are the same.  At first I thought we would see an increase in 2013, but as companies started cutting back on construction of new mines as well as high-grading (extracting higher grade ore), consumption remained flat.

We must remember, these gold mining companies consume diesel in the transportation of their waste rock and ore, mine construction and to a lessor extent… electric generation when connecting to the grid is not possible or economical.

Diesel consumption per ounce of gold produced increased in 2013 at Barrick and Newmont, but fell at AngloGold, Goldfields and GoldCorp.  However, total diesel consumption in the group increased from 583 million gallons in 2012 to 591 million gallons in 2013.  The reason the gallons per ounce figure remained the same in 2013 as it was in 2012 was due to an additional production of 300,000 oz of gold.

While the top 5 gold miners doubled their diesel consumption per ounce of gold produced since 2005, their actual energy cost increased a great deal more.  The next chart reveals just how much these costs increased.

In 2005, these gold miners spent an estimated $30.48 of diesel per ounce of gold produced.  This figure doubled by 2008 to $69.92 when the price of a barrel of oil skyrocketed to $145.  When the recession hit in 2009, causing the price of oil to plummet, diesel costs for the gold miners declined as well.
Then over the next three years, diesel costs per ounce increased significantly from an estimated $55.91 in 2010 to $102.43 in 2012.  Even though the figure in 2013 is slightly lower than 2012, costs have more than tripled since 2005.

I estimated these figures by using the average annual price of diesel stated by the EIA – The U.S. Energy Information Agency.  Here is their data table:
U.S. Diesel Prices

The price of gallon of diesel was $2.40 in 2005, hit a peak of $3.97  in 2012 and averaged $3.92 in 2013.  So, not only have the gold miners doubled their diesel consumption for each ounce of gold produced (2005-2013), the price of diesel increased 63% during the same time period.

Now, if we go back just a few more years and look at the rate of change since 2003… its staggering.  I don’t have the actual diesel consumption figures for the top 5 gold miners for 2003, so here I provided some estimates below:

2003-2013 Estimated Change In Diesel Consumption & Cost

2003 = 12 gallons per ounce (conservative estimate)
2003 = $1.51 price of gallon of diesel
2003 = $18.12 diesel cost per ounce
2013 = 25.8 gallons per ounce
2013 = $3.92 price of gallon of diesel
2013 = $101.14 diesel cost per ounce

What a difference a few years makeaye?  Here we can see that the price of diesel in 2003 ($1.51) was almost a Dollar less than it was in 2005 ($2.40).  I was conservative and estimated that diesel consumption declined to only 12 gallons per ounce in 2003 compared t0 12.8 gal/oz in 2005.

Thus, the actual estimated diesel costs per ounce increased more than five times since 2003… actually 5.6 times.  Which means, the top 5 gold miners spent on average, $101 on diesel for every ounce they produced in 2013 compared to $18 in 2003.

Even though this diesel cost figure only represents a small part of the overall costs to mine gold, energy still represents the largest factor in determining the value of gold.  When I say that, it goes above and beyond the additional sources of energy such as electricity a gold mining company purchases when they process and refine gold.

It’s important to realize that all the mining equipment and materials used in the gold industry are not produced out of THIN AIR in the same way the Fed creates money.  All the metals and products that go into manufacturing mining equipment are only made possible by the huge amounts of energy consumed in the process.

This is also true for the materials consumed at the mine.  For example, Barrick purchased 292,000 metric tons of lime in 2012 at its mines.  Lime is listed as a material cost on its balance sheet, but the overwhelming factor to produce lime is calculated by the energy consumed in all forms and all stages.

We must remember, lime is extracted by huge excavators and moved by huge trucks which is then transported from the quarry to the mine by more trucks.  This all consumes a great deal of energy.  Again, the value of the lime used in the gold mining industry comes from the amount of energy consumed in all forms and stages.

Lastly, we also need to consider all the human labor in all stages.  Lime isn’t extracted or transported by robots (not yetLOL), but by humans.  Human labor is a form of energy.  So, when a reader sends me an email saying that labor is a higher cost than energy on a typical gold company’s balance sheet, I politely respond by saying… HUMAN LABOR IS ALSO A FORM OF ENERGY.
In conclusion, the gold mining industry consumes a lot of diesel to produce an ounce of gold.  As we can see, total diesel costs are rising even faster.  I am not concerned about the impact of increased diesel costs on the gold mining industry in the following years.  However,  the real threat to the industry will be a lack of available fuel supplies in the future… not the energy cost.

I will discuss this in more detail in future articles and reports.


Ugo Bardi is a member of the Club of Rome, faculty member of the University of Florence, and the author of "Extracted" (Chelsea Green 2014), "The Seneca Effect" (Springer 2017), and Before the Collapse (Springer 2019)