Roulston in his last article addresses some of the reasons for the disappointing level of profitability among the major gold mining companies, but this also could apply for copper. He is of the opinion that rising operating costs have been a major factor for all miners. According to him, energy requirements to run the mining operations account for about 40% of the operating cost of the typical mine. He points out that energy costs (oil?) have been rising at the same pace as gold. In addition, lack of skills across the mining industry (worldwide?) has increased the labor coasts. He also points out to almost global increase in taxes and royalties.

Roulston also points out that one of the most important factors in the rising cost structure is the ore grade itself. For example he points out that 10 years ago the average mine grade for gold was about 2.5 gm/t, while today it is down to about 1.3 gm/t. So twice as much rock is now being mined and processed to obtain similar amount of gold compared to 10 years ago.

Roulston states that: “Some analysts attribute the declining grade to an expansion of the gold mining industry in response to a rising gold price. That assessment is half right: the gold price has risen. During the time that the gold price has increased by six-fold, gold production has grown by a mere 8.9% a year. The gold mining industry has spent enormous amounts of money to develop new mines, but those new mines have done little more than offset the depletion of older mines.”

Roulston goes on to state that: “As an illustration, let us look at the re- serves and resources for Barrick, the largest gold producer. The average grade for the company’s reserves is 1.3 grams per tonne. The average grade for the company’s resources (beyond the reserves) is only 0.7 grams per tonne. Simply put, the gold mining industry is developing the best available deposits. As far as I can see (and I have looked long and hard) there is nothing in the exploration/development pipeline to suggest a reversal of this downward trend in the average gold grade.”

Roulston then goes on to say: “Investors and analysts are out of date with regard to their expectations of grades for gold deposits. Projects are heavily discounted by investors who apply metrics that were meaningful a number of years ago but are no longer relevant. A similar story applies to most of the other metals. At this time, with investors fleeing global financial uncertainty, investors have little or no interest in undeveloped gold deposits, whatever the grade. (There are companies with gold deposits which are trading for less than cash value.)”