See below Harris Kupperman (Adventures in Capitalism) estimates the costs of finding and producing gold. Tyhee is well past the first stage, so the future costs for us are considerably lower. Interesting that he mentions that generally new mines are debt financed. Dilution is minimized that way, good for current shareholders. Ike (Sorry the graph does not come out in the post, please go to the weblink.)

http://adventuresincapitalism.com/page/Whos-Kuppy.aspx

So what is the real cost of producing gold? Let’s approach this question in a different way. If I wanted to build a mine from scratch, what would it cost me to mine gold? First, I would have to find some gold to mine. Industry estimates on this topic are very diverse. People find gold all the time. Finding economic gold is much harder. Industry wide, the cost of finding an ounce of gold ranges from $80 to $150 an ounce. The number is so high because so much money spent looking for gold is wasted as nothing is found.

Next, you have to pay for engineering, economic and environmental studies on your mine. This costs around $40 an ounce. It breaks down as; $10 for engineering, $5 for economic and $25 for environmental studies (permitting). You don’t have a mine without permits. Permits also include the schools and hospitals you need to build next to your mine to make the locals happy.

Once this is complete, you need to build your mine. There is a massive discrepancy on how much this costs based on where the mine is located, mine type, ore grade and metallurgy. Building a new mine costs tens and often hundreds of millions of dollars. For really big mines, this figure can be in the billions of dollars. If you divide that figure by the number of ounces the mine will produce over its lifetime, you come to a mine building cost of between $100 and $200 an ounce.

However, you cannot simply build a mine and leave it alone. You need sustaining capital to replace and upgrade equipment. Generally speaking, this will run you $25 to $75 an ounce.

While the popular cash cost figure includes mine employees, it doesn’t include corporate management or the general costs of running a company. I don’t know why this is—but such is the obfuscatious nature of mining accounting. Generally speaking, this will run you another $50 an ounce.

Once you add in the much trumpeted cash cost, you can see what the real cost of an ounce of gold is. All costs are in US Dollars.

Cost ComponentLow EstimateHigh Estimate Finding Gold Engineering, Economic and Permitting Mine Building Sustaining Capital General SG&A Total Cash Cost Actual Cost of Producing and Ounce of Gold

80	150
40	40
100	200
25	75
50	50
295	515
450	450
745	965

Most mines are debt financed. This $745-$965 an ounce number does not include any interest expense incurred in a mine. It also doesn’t include the cost of continuing community relations or mine closure. I would guess that community relations adds another $10 per oz per ounce and closure costs can be astronomical depending on what sort of contamination exists. There are plenty of other costs not included above.