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Bottom-line boosters

John Seelmeyer

Gold prices close to $900 an ounce are indisputably good news for the mining industry in Nevada.

But even better news for the industry’s long-term health in Nevada might be the steps it’s taken to control its production costs.

With gold prices averaging $695 an ounce during 2007 and topping $900 on several occasions this year the mining industry’s production in Nevada last year totaled $5.4 billion, up by about $500 million from year-earlier figures.

But as gold prices have risen sharply in recent years, the industry has given back some of the potential profit as its costs have risen quickly, too.

That appears to have changed in 2007, says John Dobra, an economist at the University of Nevada, Reno, who follows the mining industry closely.

The mining industry’s production costs rose by 11.8 percent last year, Dobra says in a newly published report commissioned by the Nevada Mining Association.

The 11.8 percent increase, he notes, is less than half the percentage increases that were common in the past few years.

Currently, the cash cost of producing an ounce of gold in Nevada averages $408 an ounce. (The cash cost doesn’t include depreciation or other non-cash expenditures.)

With gold near $900 an ounce and the state’s mining industry kicking off $1.53 billion in net proceeds during 2007, those production costs might not be a worry.

But for the first half of this decade, when gold prices generally stayed in the $300-an-ounce range, the state’s miners would have been losing money with their current cost structure.

Part of the increase in costs has been intentional, Dobra notes. When prices are high, mining companies focus on lower-quality ores that they can’t profitably process when prices are low.

But at the same time, he says mining companies have taken steps great and small to get their operating costs under control.

Barrick Gold, the state’s biggest mining company, and Newmont Mining Corp., the second biggest, both have built power plants to meet their big appetites for electricity and to keep the cost under control.

Newmont has said it will save $25 an ounce in production costs by generating its own power.

Smaller cost-cutting measures abound, too.

A tire-management program operated by Barrick Gold, for instance, adds life to truck tires. That’s no small issue, says Barrick spokesman Lou Schack, because tires cost $30,000 a piece and each of the company’s dozens of trucks in Nevada runs on six tires.

He says, too, the company’s emphasis on employee safety and health pays benefits.

“Safe, healthy employees are much more productive,” Schack says.

The industry is catching a break, too, as global demand slackens for the construction supplies such as steel and concrete it needs to build mining infrastructure.

Still, Dobra says one industry analyst estimates that lead times for some deliveries of mining equipment have doubled in recent years.

And labor supplies remain tight and costly. Employment in the industry in Nevada was up modestly during 2007, totaling 14,470 compared with 13,840 a year earlier, Dobra says. Wages in the industry averaged $67,392 last year and gold miners made even more, as their earnings averaged over $80,000.

Those statistics, however, don’t reflect the heavy use of contract tradesman and construction contractors by the mining industry. Their numbers aren’t counted by the state in its mining employment totals.

Profitability varies widely from one mine to another.

The lowest-cost producer in the state, Dobra found, generates gold at a cash cost of just over $195 an ounce, less than half the state average.

Those costs don’t include exploration for new deposits, and exploration has risen sharply with higher prices for gold and silver.

The Nevada Division of Minerals estimates exploration investment in Nevada totaled nearly $168 million in 2007, well above the figures reported in the late 1990s when gold prices were in the doldrums.

Also rising sharply has been the number of mineral claims staked by exploration outfits on federal land in the state.

That increased exploration is paying off, Dobra said.

At the end of 2007, the state’s known gold reserves stood at about 70 million ounces. That’s the same as year-end 2004 even though some 12 million ounces were taken out of the ground during the three-year

period.

Looking into the future, Dobra said:

* Increased reliance on underground mining in the state will push up production costs and require more training of the mining workforce.

* Rising energy costs and workforce shortages are likely to be ongoing problems for the industry.


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