[PPT] - Overview of Mining Costs 24 August 2012 Rohit Savant 30 Broad PowerPoint Presentation

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Overview of Mining Costs

24 August 2012

30 Broad Street, 37th Floor New York, NY 10004 www.cpmgroup.com Rohit Savant Senior Commodity Analyst rsavant@cpmgroup.com

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Outline

1. Factors Influencing Cash Costs
2. Major Cost Components
3. South African Gold Mining
4. Metals Prices and Costs
5. Costs and Mine Supply

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Primary Factors Influencing Cash Costs Primary Factors Influencing Cash Costs

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Two Distinct Set of Factors Drive Mining Cash Costs:

The first set of factors relates to the actual costs of inputs: Skilled labor,

mining materials, equipment, reagents, structural steel, and everything else that goes into running a mine.

The second set of factors relate to the price of the underlying metal of

the mine. the mine.

higher metal prices encourage mining lower grade properties driving

higher the cash cost curve

the price of the metal also influences input costs

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Other Factors Influencing Cash Costs Other Factors Influencing Cash Costs

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Deep-Level Mining Boosts Cash Costs

This type of mining inherently pushes higher the mining cash costs

because

Of the need for more skilled labor (to deal with increased

complexities associated with such mining)

Intricate infrastructure

Increased electricity costs (for cooling deep underground shafts)

Increased electricity costs (for cooling deep underground shafts)
Overall increase in overhead and maintenance costs
In the case of some metals, like platinum, depth of mining is rising as

metal available at shallow levels has for the most part already been extracted.

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Reduced Production Raises Cash Costs

There is an inverse relation between the level of production and the per
unce cash cost.
Higher production helps reduce the fixed cost components.
Lower production can result from:
Safety related production stoppages
Technical problems
Lower grades

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However…

Most cash cost components are variable costs.
As a result of this, the rate at which these costs rise (input cost inflation)

plays an important role in influencing the overall cash costs

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Input Costs Input Costs

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Labor Costs are the Largest Mining Cash Cost Component

Other Consumables

Typical Gold Mining Cash Cost Breakdown Component Range Typical

Typical Gold Mining Cash Cost Breakdown

Labor Fuel Utilities Parts and Supplies

Component Range Typical Labor 30% - 55% 50% Fuel 8% - 10% 9% Utilities 8% - 11% 10% Parts & Supplies 8% - 15% 12% Consumable 14% - 23% 7% Other 7% - 15% 12% 100%

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South African Gold Mining Cash Costs South African Gold Mining Cash Costs

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Wages Have Been Rising Faster than the Benchmark

4 6 8 10 12 14 16 4 6 8 10 12 14 16 Premium/Discount to Benchmark Benchmark Percent Percent Wage Inflation: Benchmark and Premium/Discount of Actual Wage Increase to Benchmark

The benchmark is

inflation plus two percent.

Premium/Discount is

the difference between the actual average

6
4
2

2

6
4
2

2 01 02 03 04 05 06 07 08 09 10 11 12

the actual average wage inflation less the benchmark.

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Sharp Increases in South African Electricity Tariffs

25 30 35 25 30 35 Eskom's Annual Electricity Increases Annual Increases in Eskom's Electricity Tariff Rates Percent Percent 5 10 15 20 5 10 15 20 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12p

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Methodology to Calculate Input Cost Inflation

Determine the inflation of each component.
This inflation then needs to be weighted by the weighting of that

component in the cash cost breakdown.

The sum of the above then needs to be weighted by production at
Mine level
Country level

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Price of Underlying Metal Price of Underlying Metal

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Gold: Near a Cyclical Peak in a Secular Bull Market

1,200 1,400 1,600 1,800 2,000 1,200 1,400 1,600 1,800 2,000 S/Ounce S/Ounce Quarterly Average Gold Price, Forecast through 2013 Forecast (2014 - 2021) Average Price of Gold: $,1684

Gold prices are expected to remain high by historical standards, going forward.

200 400 600 800 1,000 1,200 200 400 600 800 1,000 1,200 68 73 78 83 88 93 98 03 08 13 Historical Long- Term Average Price

f Gold: $403

Historical (2002 - Q2 2012) Average Price of Gold: $790

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Investment Demand

Investors have been purchasing gold for a variety of reasons over the past decade.

Just some of these reasons are:

increased concerns regarding major reserve currencies
two recessions in the past decade (2001, 2007-2009)
negative real interest rates
concerns of inflation
poor management of issues related to trade, debt, and deficit imbalances
poor management of issues related to trade, debt, and deficit imbalances
These problems are real and some are expected to take several years to be resolved.
Investors are expected to continue adding to their holdings in historically large volumes!
They are not, however, expected to chase gold prices higher as was seen during the past

few years. Instead investors are expected to add to their holding on prices declines.

This is expected to both weigh on gold investment demand and the price of gold.

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Inverse Relation between Gold Price and Gold Grades

800 1000 1200 1400 8 10 12 14 Grade Gold Price (RHS) Grams/Metric Tons $/Ounce 200 400 600 800 2 4 6 8 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

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Gold Mining Has Become Extremely Profitable Again

1,400 1,600 1,800 1,400 1,600 1,800 The Price of Gold and Cash Operating Costs of Production Quarterly, Through Fourth Quarter 2011 $/Ounce Gold Price $/Ounce CAGR: 20%

700 800 900 1,000 700 800 900 1,000 $/Ounce $/Ounce Margin between Gold Price and Total Production Costs and Cash Cost Quarterly, Through Fourth Quarter 2011

200 400 600 800 1,000 1,200 200 400 600 800 1,000 1,200 02 03 04 05 06 07 08 09 10 11 Cash Cost Production Cost CAGR: 13% CAGR: 14%

100 200 300 400 500 600 700 100 200 300 400 500 600 700 02 03 04 05 06 07 08 09 10 11 Gold Price minus Total Cost Gold Price minus Cash Cost

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Gold Mining Cash Profit Margins in the 1980 and 1990s

1,200 1,400 1,600 1,200 1,400 1,600 $/Ounce $/Ounce

The Price of Gold and Cash Operating Costs of Production Annual Data, Through 2011

700 800 900 1,000 700 800 900 1,000

Margin between Gold Price and Cash Cost Annual, Through 2011

$/Ounce $/Ounce 200 400 600 800 1,000 200 400 600 800 1,000 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 Gold Cash Costs 100 200 300 400 500 600 100 200 300 400 500 600 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

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Cash Costs and Mine Supply Cash Costs and Mine Supply

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Most Gold Production Is Profitable Below $1,000

90% of global gold production from primary gold mines was produced at cash costs lower than $1,033 per ounce during the third quarter of 2011. The flatness of the gold cash

$1,600 $1,800 $2,000 $2,200 $2,400 $1,600 $1,800 $2,000 $2,200 $2,400 Cash Cost /Ounce Cash Cost /Ounce Annual Average Gold Price in 2011 = $1,569 Gold Mine Cash Costs in 2011

cost curve makes gold production relatively less sensitive to changes in the price of the metal.

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Weighted Average Cash Cost = $621

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Cash Costs and Mine Production

There is a lag effect between the margin between cash costs and prices and the increase/decrease in supply

40 48 56 64 72 80 500 600 700 800 900 1,000 Margin Mine Production (RHS)

$/Ounce Million Ounce Gold Mine Production and the Margin between the Gold Price and Cash Costs

8 16 24 32 100 200 300 400 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

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Gold Mine Production Forecast to Rise

20 25 30 35 20 25 30 35 Post 2015 2015 2014 Estimated Annual Gold Mine Production Capacity Gross Additions

Mln. Oz.
Mln. Oz.

5 10 15 20 5 10 15 20 2011 2012 2013 2014 2015 Post 2015 2013 2012 2011

Note: Post 2015 data refers to 2016 through 2021.

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About CPM Group About CPM Group

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Consulting Investment Banking Commodities Research Asset Management Commodities Management Research

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COMMODITY RESEARCH PRODUCTS

ANNUAL YEARBOOKS SPECIAL STUDIES LONG TERM OUTLOOKS MONTHLY ADVISORIES

27

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