Rising prices help miners thrive despite higher costs

Production is down. Costs are up.

Even so, Nevada's mining industry is rolling in high clover a tribute to the restorative powers of gold prices that were well above $750 an ounce last week.

A newly released study by an economist at the University of Nevada, Reno, says the industry continues to boom, as the value of mineral production in Nevada reached a record $5.1 billion in 2006.

That's a 38 percent increase over year-earlier figures, says economist John Dobra, and it's giving the industry some breathing room as production costs continue to rise.

Cash production costs, Dobra said, averaged $365 an ounce for gold produced in the state during 2006, up from $288 in 2005.

That 28 percent increase in production costs, however, wasn't immediately painful as gold price rose even more rapidly spiking 35 percent from an average of $445 an ounce in 2005 to an average of $603 last year.

And Dobra noted that a portion of the cost increases are self-inflicted.

Some mining companies in the state, he said, are taking advantage of high prices to process low-grade deposits that might not be economically feasible when prices are lower.

If prices dip, they can move back into higher-grade deposits.

Other costs notably, the cost of diesel fuel to power giant mining trucks and loaders are outside the control of producers.

Labor costs have risen as operators scramble to find enough good help to staff booming operations. In 2006, the industry employed 13,800 people in Nevada with a total payroll of $859 million, an average of $70,023 a worker. A year earlier, payroll for the industry's 12,770 workers in Nevada totaled $720 million an average of $62,712 per employee.

Also driving production costs higher, Dobra said, were a number of new and expanded mining operations in the state they take a while to reach fully efficient production and an increasing amount of underground mining.

Underground mining often targets richer deposits than the surface mining techniques that are common in northern Nevada, but it's often more difficult and expensive, the economist said.

"This will obviously require different production techniques, new equipment and the need for continued labor force training," Dobra said.

The rising value of mines' output in the state masks the fact, too, that actual production is falling.

The Nevada Division of Minerals reports that 6.3 million ounces of gold were mined in the state during 2006 compared with 6.85 million ounces a year earlier. This marks the sixth consecutive year in which production declined.

The state accounts for 75 percent of the gold mined in the United States, and the U.S. Geological Service says it ranks fifth in the world in total production. Nevada trails South Africa, Australia, China and Peru.

Higher prices have spurred exploration in the state, Dobra noted.

The Division of Minerals estimates exploration expenditures at $165 million last year, and almost everyone thinks the number is conservative because it doesn't include much data from the small mining companies that do much of the grassroots exploration in Nevada.

The $165 million spent on exploration last year marks a 36 percent increase over year-earlier figures, and it's more than triple the $51.2 million spent on exploration as recently as 2001.

The exploration is paying off.

At the end of last year, mining companies said their reserves in Nevada totaled about 80 million ounces of gold about the same as two years earlier, even though 13 million ounces had been mined in the meantime.

At the current pace of mining, the reserves are enough to support the industry for 12 years, Dobra noted.