Under the Microscope: The True Costs of Gold Production

(@HassMcCook) | Published on June 28, 2014 at 11:00 GMT

Hass McCook is a chartered engineer and freshly minted Oxford MBA. He has been researching bitcoin over the past several months and recently joined the Lifeboat Foundation’s New Money Systems advisory board.

This article is the second in a series on bitcoin’s sustainability. Having previously examined the cost of bitcoin mining, here McCook seeks to quantify the economic and environmental factors involved in mining gold.

gold

Gold has been used for millennia as a means to project and protect wealth.

As the data below indicates, 52% of all gold ever mined is used for jewellery and palatial adornments. In terms of protection, central banks hold 18% of the world’s gold supply and other investors hold 16% (Hewitt, 2008).

However, the metal also has practical applications, with 10% of yearly demand coming from industry (World Gold Council, 2012). Almost 12% of the world’s supply of gold is contained within technological products, and is lost forever unless recycled – which has its own costs attached to it.

For completeness, according to the World Gold Council (2012), over 2700 tonnes of gold were produced and over 1600 tonnes of gold were recycled in 2011.

chart 1

Gold is valuable is due to its intrinsic properties: it is highly durable, malleable and never loses its lustre. Most importantly, it is scarce, and becomes increasingly more difficult and expensive to mine – so it is safe from inflation.

It is for these reasons, as well as its applications for industry, that the metal has demand, and by extension, value. The following paragraphs seek to quantify the lifecycle of gold, as well its economic, environmental and social costs.

Future Trends

Gold is becoming both harder to mine and more scarce, which means that its associated costs will continue to climb.

Relative labour costs are also increasing dramatically, which could be a large driver in the metal's future mining cost. As most of the energy used in mining comes from non-renewable fossil fuels like diesel, there isn’t much hope for reducing its carbon footprint in the near future.

With that said, there is hope for improvement in gold recycling as national grids transition to green energy. Additionally, annual statistics on mining fatalities are improving.

As can be seen from the figure below, at current production rates, known global gold reserves will be depleted in 20 years’ time. New production will rely on recycling.

chart 2

Mining Lifecycle

As can be seen from the graphic below (Minerals Council of Australia, 2014) the mining of gold is an intensive process, and the lifecycle of a mine is typically quite long and varied (upwards of 20 years).

Although there are triple-bottom-line costs associated with each of these stages, the most expensive stages are the fourth, fifth and sixth: construction, production and rehabilitation.

chart 3

Mine construction provides the necessary infrastructure to allow for a productive mine; this includes bulk earthworks and the construction of roads and facilities. It can generally take several years to complete.

Rehabilitation involves returning the land as close to its pre-mining condition as possible to allow plant and animal life to flourish, or the original owner to use it as they please. Although these activities have both impacts and costs associated with them, these pale in comparison to production itself.

Figure 4 shows the process of extracting gold from the ground. Whilst we will not discuss the activities involved in the process chain, you will notice that large volumes of rock, water, and cyanide are used to produce gold.

There is a plethora of peer-reviewed scientific literature and industry-based data on the economic, environmental and social impacts of these processes, and they will be discussed in the following sections of this report.

chart 2

Economic Costs of Mining

At the time of writing, the price of gold was approximately $1,250/ounce. Here, I will provide industry data on the economic cost to miners to produce this ounce.

In early February 2014, the World Gold Council noted that the average industry cost of production is $1,200/ounce, with 30% of the industry becoming unprofitable if the gold price drops below that level (Rudarakanchana, 2014).

Barclay’s commodities research provides similar figures. Their report from April 2013 shows that the marginal cost of production was $1,104/ounce (Barclays Commodities Research, 2013).

Andrew Su, CEO at brokerage firm Compass Global Markets concurred, stated that the cost of producing gold in Australia had jumped to over $1,000/ounce in 2013 (Naidu-Ghelani, 2013).

2,700 tonnes, or just over 96 million ounces, of gold were mined in 2012. At an average of $1,100/ounce, this puts the economic cost of mining gold at $105.6bn.

Environmental Costs of Mining

While the cost of mining is easily and conveniently packaged into a cover-all $1,100/ounce figure, the devastating toll it has on the environment can often be overlooked.

The table below compares and contrasts various lifecycle analyses of gold-mining, presented in different peer-reviewed journals and scientific sources:

table 1

With 2,700 tonnes, or, 2.7 million kilograms of gold mined each year, using low average numbers from the above literature review, total yearly impacts can be summarised as follows:

table 2

Recycling

Gold can be recycled, and frequently is – Figure 1 shows that just over a third of all gold produced each year is recycled.

Recycling is significantly less energy intensive than mining gold, however, definitive data does not exist as to the exact energy savings (US EPA, 2012). As an indication of how much energy is saved recycling, here are statistics for other metals and products (The Economist, 2007):

  • Aluminium: 95%
  • Steel: 60%
  • Plastics: 70%
  • Paper: 40%
  • Glass: 5-30%

Assuming optimistic energy savings of 90%, energy used to recycle gold would be 475 million GJ x 0.5 (ratio of recycled to mined gold) x (1 – 90%) (energy saving) = approx. 25 million GJ.

Converting GJ of energy to tonnes of CO2 & Dollar Cost

The most consistent approach to converting GJ of energy to tCO2 would be to use a weighted average of tCO2 produced by the source of primary energy supply. This is calculated in the table below (Moomaw, et al., 2011), (Sovacool, 2008), (US Department of Energy, 2013):

table 3

1GJ is equivalent to 277.77 kWh or 0.2777 MWh, therefore, 25 million GJ results in 4 million tonnes of CO2 produced at 600g/kWh. To sense-check these results, mined gold results in 54 million tonnes of CO2.

Therefore, it can be concluded that carbon emissions are cut by 90% if gold is recycled, so long as the above assumptions hold true. This conclusion seems logical, due to not having to deal with huge amounts of waste rock, water, cyanide and other chemical by-products during recycling.

At an average cost of $100/MWh of electricity generated, the economic cost of energy used for recycling would be $694.25m.

Assuming that all recycled gold is low-grade 14 carat, this means that cost to acquire 1600 tonnes of scrap gold is as follows:

Screen Shot 2014-06-27 at 17.03.56

The cost to acquire recycling facilities has not been considered, as this is expected to be marginal.

After rounding, we can conclude that the recycling of gold costs about $40bn per year (and rising), or about $780/ounce.

Social Costs of Gold Mining

The obvious major social costs of gold mining are native land-owner rights, the human rights abuses involved in obtaining “conflict gold”, and the unacceptably high worker fatality rates. According to research by Oxfam (2004), 50% of all newly mined gold is taken from native lands.

Gold is a renowned conflict mineral, with more than $600m of gold estimated to leave Congo every year alone – this metal is tainted with physical and sexual violence, and human enslavement.

The mining of gold allows local warlords to continue to finance their armies, causing suffering to millions of Africans (Raise Hope for Congo, 2014).

Most striking are the statistics on worker fatalities, which whilst incomplete and incomprehensive due to difficulty in obtaining reliable international data, still serve to paint an ominous picture.

chart 5

As can be seen, statistics from a very small sample of gold-producing countries show almost 50,000 fatalities in the last century alone.

In addition to this, gold has been mined for centuries, surely causing tens of thousands of more deaths prior to statistics being recorded.

Also to be noted, the above data only cover fatality statistics, and overlook injuries and long-term effects on health such as tuberculosis, silicosis and other occupational diseases.

Gold Investment Fraud

Precious metal fraud has cost Americans $300m since 2001 alone (Miedema & Bartz, 2014), but on a global and historical scale, the damage has been significantly worse.

In a one-off event, BRE-X, a Canadian gold mining scam, cost investors $6.5bn in the biggest mining scandal of all time (Ro, 2012). There are several other documented and undocumented large-scale precious metal frauds that have occurred throughout history, which would be impossible to completely quantify.

Now we’ve looked at the costs of gold production, it’s time we compared it with the cost of generating other stores of value. Check back next week for the third article in the series, in which Hass McCook examines the sustainability of printing and minting currency. If you missed the first part of the series on the true costs of bitcoin mining, be sure to check it out.

Gold Image via Shutterstock

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