For state's mining industry, less is more

Gold production in Nevada declined during 2008, and production costs rose significantly, but those aren't necessarily bad things.

A new analysis prepared for the Nevada Mining Association says mining companies appear to be taking advantage of record-high gold prices to process lower-quality ores.

Those ores couldn't be processed profitably when gold prices were lower, says John Dobra, director of the Natural Resource Industry Institute at the University of Nevada, Reno, and author of the study. Because Nevada's mining companies can process them today, it allows them to hold back on richer reserves for another day.

"In the long run, it extends the life of ore bodies and enhances the sustainability of the industry," Dobra said in his annual analysis of the industry's financial health. "It benefits the communities that rely on mining."

Nevada's mines which rank fourth in production worldwide produced 5.7 million ounces of gold in 2008, a decline of about 4 percent from the previous year's 6.04 million.

The cash costs of producing an ounce of gold, meanwhile, rose by 11 percent and averaged $525 an ounce at Nevada's mines. (Cash costs, as calculated by miners, don't include depreciation or debt service.)

Even so, the high price that miners received for gold it averaged $872 during 2008 on its way to this year's $1,000-plus levels gave mining companies ample headroom.

Dobra said all of the state's gold mines appear to have generated positive cash flow during 2008, and he believes most if not all were profitable even after depreciation, exploration and other costs are folded in.

Because mining producers have focused on processing lower-grade, higher-cost ores whenever prices have risen, Dobra said cash-flow margins have remained fairly stable in the industry year in and year out.

Although the Nevada Mining Association study focuses on 2008 figures, some of the trends that were developing a year ago appear to be playing out favorably for the industry this year.

Some of the increases in production costs that miners reported in 2008, for instance, reflected sharp increases in electricity and diesel-fuel prices. But those prices had declined by late 2008 and haven't spiked this year, Dobra noted.

Another factor that drove mine costs sharply higher this decade rising costs for steel, concrete and other construction materials also abated with the economic slowdown.

On the other hand, he said some of the cost increases for construction materials, chemicals, rubber tires and the like now appear to be permanently baked into miners' production costs. That might present a problem if gold prices decline.

Payroll costs also rose in the Nevada mining industry during 2008.

Dobra said the industry employed 14,600 statewide up by about 130 positions from a year earlier but payroll spending rose by 4 percent. Paychecks from Nevada's mining industry totaled $1.01 billion during 2008.

The average pay of $69,313 in the mining industry is about 65 percent higher than the average pay for all workers in Nevada.

Dobra said exploration investment appeared to remain at fairly high levels during the year, and the number of exploration claims staked on federal land has rebounded sharply.

Known gold reserves at the end of 2008 stood at 70.4 million ounces enough to maintain production at current levels for 12 years. Mining companies brought enough new reserves onto their books to replace the gold that was mined during the year.

Nevada's gold production accounts for about 7 percent of the gold mined in the world.

Copper and silver also made contributions to the $2.5 billion added to the state's economy from mining production during 2008.

Silver production, Dobra said, amounted to about $119 million as higher prices offset the effects of mine closures and declining production in recent years.

Copper production amounted to about $555 million, even though copper prices fell sharply during the last half of 2008. Major production from Quadra Mining's Robinson Mine near Ely and Newmont Mining's Phoenix Mine near Battle Mountain are adding to the state's copper production.

Geothermal resources, meanwhile, play a greater role in the state's mining economy.

The Nevada Department of Taxation says that geothermal producers generated revenues of $95 million in the state during 2008. That, Dobra said, is enough to rank geothermal as the fifth-largest geologic resource in Nevada.