How Gold is Mined
Gold was one of the first metals ever to be mined. Gold mining is the process of extracting gold from the earth using methods of mining, panning, sluicing, dredging, and processing. This term covers everything from exploration to drilling, extraction to assessment, and financing to refinement.
Gold is Scarce
Gold is relatively scarce, rarer on average than platinum. It is typically found in low concentration in rocks in two principal types: Lode (primary) deposits and placer (secondary) deposits.
On average, the Earth's crust is 0.005 parts per million of gold. The process of extracting this gold is expensive to mining companies, primarily because large quantities of ore must be handled for small rewards. Moving, grinding, and processing ore requires significant energy and use of chemicals, which are expensive inputs. This high level of work limits the quality of ore that can be used in the mining process.
Gold is concentrated both above and below the Earth's surface. Alluvial gold is found on top of the surface, concentrated due to moving water, especially rivers. Metallic gold, which is of high density, will become concentrated in a placer (secondary) deposit when it falls out of suspension in slow flowing water. This environment is where miners, or modern-day equivalents, use gold pans to extract gold particles.
Primary deposits, or lode deposits, are also known as underground veins. They are produced in ore alongside metallic deposits, including sulphides and pyrites. Minerals are pulled away over time, but finding ore with a sufficient gold yield for mining is extremely rare.
Gold Extraction and Purification
Around 80 percent of gold in ore remains in its elemental state, due to its inert nature. Several processes are employed to mine, extract, and purify this gold.
One process, amalgamation, uses mercury to dissolve gold. This process is highly environmentally sensitive, as it involves applying mercury to ore to dissolve the gold, distilling the amalgam, and boiling off the toxic mercury. As a result, an amalgamation is an expensive option for gold mining.
Cyanidation is the most important purification process for gold mining. In a process called vat leaching, a sodium cyanide solution is applied to good quality ore, causing the ore to release gold into the solution. Lower quality ore needs heap leaching, which requires large quantities of ore being sprayed repeatedly with a sodium cyanide solution.
Raw gold is then purified in one of two ways, either with the Miller process or the Wohlwill process. The Miller process is a less expensive solution, which involves using chlorine gas and purifying gold to 99.5 percent. The Wohlwill process will purify gold to 99.9 percent by electrolyzing gold.
To indirectly invest in gold, traders can purchase gold mining stocks. This popular method has advantages and disadvantages.
- The value of gold mining shares is normally more sensitive to the price of gold than gold bars. Shares are priced according to their anticipated profits during the life of a given mine, depending on the mine's reserves and a relationship between mining costs and the anticipated value of gold extracts.
- For example, imagine a gold mine has 1 million ounces underground and the value is measured at $1,000 an ounce, with the production cost at $800 an ounce. The mine would, therefore, make (on estimate) $200 million. However, if gold prices rise by 20 percent to $1,200, the mine would then make $400 million, which demonstrates a "gearing" effect of four times.
- It is not possible to accurately estimate a gold mine's reserves, as estimates are based on sample sizes, which are extrapolated to measure likely reserve totals. Recorded reserves may not always reflect reality. Several elements can affect gold reserve estimates, including human nature and engineering problems, increased production costs, prospectors manipulating results, and the fine judgment of geologists and financial controllers, who are often overly optimistic.
- Exchange rate movements can also have an impact on mine profitability, particularly if the mine bears a currency other than dollars, which translates to adjustments in profits and losses.
- Stakeholder sentiment is the biggest variable to consider. During good gold bullion markets, the shares will outperform gold itself and reasonable valuations of the mine's future cash flow. Since a mine will eventually be useless (when the gold is gone), the return on mining must pay back the original investment and some profits. Gold shares are often overvalued because they must discount a substantial bullion price fluctuation over the long term.
- Gold mining company accounts are often less than transparent, with intimidating financial statements and lack of clarity for traders.
- Corporate culture may also be a problem, as few strict dividend policies on which shareholders can base their investments exist.
Beyond these listed disadvantages of the mining process itself, don't overlook the social costs of gold exploration. In small countries where gold has been discovered, investments must be made in infrastructure (such as roads, hospitals, and schools) in order to access the ore. Governments of these countries may quickly assess a reserve and rush mining permissions. Thus, the costs rise faster than the value of the gold itself.
While gold mining shares are exciting, they are equally risky. They are subject to many variations independent of actual bullion markets. Buying actual bullion is truly less expensive and time-consuming than trading with gold mining stocks. Choosing the correct gold mining index to follow or invest is crucial.
No More Easy Gold
No more easy gold exists in any of the relatively safe and secure parts of the globe. South Africa, which was until recently the world's top-performing gold reserve, has halved its output since 1998. China is now the top producer, but the country lacks significant protections for gold miners and financial investments. Some investment experts have estimated that China will run out of reserves in six years if the country doesn't discover and develop new deposits soon. In North America, gold mining has dropped to 78 percent of its 2002 output.
In current mining practices, the quality of gold ore has dropped significantly. Mining companies have to dig farther to produce each ounce. Occasional problems have occurred with populist governments seizing mines and assets belonging to private producers (in Fiji and Russia, for example).
Concerns over environmental impacts also hinder gold mining. Romania, for example, may exist as the largest undeveloped gold reserve in Europe. Accessing this gold ore would require essentially moving five mountains and spilling mercury, cyanide, and other chemicals and metals into the natural environment. No carbon offsets exist for this type of destruction.
Big Finds Lacking
Replacing current reserves with new discoveries is becoming harder and harder. For the market to remain viable, gold miners must build on the value of their balance sheets.
From 1985 to 2005, gold discoveries dropped by 30 percent from the previous 15 years. The cost of locating new reserves rose during this period by about 2.6 times. Large deposits, defined as 2.6 million ounces or more, have become more and more rare, not replacing the current rate of production.
Some gold mining geologists have worried that the next big reserves for gold most likely don't exist.
Soaring Costs Eating Into Profits
To offset the cost associated with new discoveries, gold mining companies work hard to extract more gold from their existing reserves. This activity increases the costs of gold mining and brings higher risks for the mine workers themselves.
In some of the world's deepest gold mining projects, companies are digging as far as (2.5 miles) into the earth for gold ore. This venture was extremely expensive (up to $700 million at early estimates) to deepen and expand company mines in places such as South Africa. As Mining Weekly describes, "Mining deeper and deeper does not come cheaply .... At Driefontein, apart from the capital costs to get there, mining at depth will cost ZAR66,000 per kilo ($296 per ounce) over the life of the mine."
The cost of mining in South Africa is higher than costs in North America. Nonetheless, the world's second- largest gold mine, based in the United States, saw its average mining costs rise by two-thirds an ounce from 2002 to 2007. Costs have affected all levels of mining, including Barrick Gold, the largest gold mining company in the world, which experienced a decline in output in 2017 from the year before.
Gold Mergers and Acquisitions
Gold mining companies often struggle to maintain their share price. According to Michael Martin, gold stock investor from R.F. Lafferty in New York, "It is still easier and cheaper to find gold on the stock market than to find it through exploration."
Investing in gold mining mergers and acquisitions does help boost a company's shrinking reserves. In any case, continued exploration for further gold reserves will do nothing to boost total global supplies.
From 1993 to 2003, post-merger exploration budgets shrank by 20 percent, in comparison with the money spent by individual gold miners during a year prior to a merger. Declining reserves replacement may result in a shortage of gold supply in the long term.
Know Your Risks
Investing in gold mining stocks is, in many ways, similar to playing the lottery. Considering the above history and current information, risks to gold mining investment are steadily rising. While strong research and analysis can improve a trader's chances of earning on gold stocks, a trader still needs to consider many risks.
When compared with investing in gold bullion itself, buying gold mining stocks comes with the added risk of political and management problems. Costs can eat quickly into profits. If individuals are considering investing in gold for security, rather than high-risk returns, then they should be wary of leveraging gold stocks against gold price.
Gold mining stocks and gold bullion are two completely separate ideas, and they should be treated as such. As the gold mining industry continues to struggle to raise its output, the decreasing supply of gold is coming to heads with rising demand for the safety and security of gold bullion.
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Please note: This information is provided for informational purposes only. Previous price trends are in no way guarantees of future performance. Before investing in gold or any other asset, consult with your financial adviser.