Gold Price Framework Vol. 2: The energy side of the equation – Part II

Gold Price Framework Vol. 2: The energy side of the equation – Part II By Stefan Wieler – GoldMoney

In this second part of our updated gold price framework we take a deep dive into the true energy exposure of gold mining companies. We find that gold miners are not just exposed to significant direct energy costs such as fuels and power; their indirect energy exposure is even larger. Our bottom up analysis shows that ~50% of production costs of the average gold miner are closely linked to energy prices. This is in line with the findings of part I of our gold price framework which showed that a 1% change in longer-dated energy prices impacts gold prices by about 0.5%.

Read the Entire Research Piece as a PDF here.

In the first part of this report we reviewed the gold pricing model we introduced last year and developed it further. We highly recommend reading it here to get a better understanding of the findings presented in this report. Using econometric tools, we showed that changes in energy prices – more specifically longer-dated oil prices – are a major driver for changes in the USD/gold price (with changes in real interest rates being the other main driver). In the second part of this report we take a more qualitative and comprehensive approach by examining the true energy requirements of gold mining.

The statistical analysis of gold prices in the first part was complicated by the fact that price data is often hard to get, incomplete or sometimes non-existent. However, the same problems are compounded when it comes to actual data on energy consumption by the gold industry. Gold producers are not required to disclose their energy consumption. And even if they were, it is far from clear what they would have to report and whether they would even have the data.

Data on direct energy costs in the form of fuels and power is relatively easy to find. It becomes obvious that gold mining is energy intensive when looking at the direct energy exposure, that is the fuel and power consumption of gold producers. Even comparably simple open pit mining consumes a lot of fuel for trucks and excavators and underground mining consumes electricity for cooling in addition to that. The processing of the gold ore is also highly energy intensive. Most large gold mining companies report these direct energy costs in one way or another. Typically, these reported costs are somewhere around 15-25% of all-in operating costs at current energy prices but have been higher in the past when energy prices were higher than today.

But gold mining is also energy intensive beyond the diesel and electricity that is consumed to mine and process the gold and cool the underground mines. Gold mining requires a lot of energy intensive resources and materials such as steel, chemicals, cement and tires and also machinery (trucks, excavators, mills) which consume energy in the manufacturing process. Ultimately even wages partially reflect energy costs as changes in energy prices affect the living costs such as housing and food of workers. We call these the indirect energy costs. We presume that the companies don’t even know themselves what the true energy exposure of these costs is. However, for this report, we meticulously dissected the expense side of the income statements of the largest gold producers in the world in order to estimate how much these indirect energy costs drive the expense side of gold mining.

Our bottom up analysis shows that ~50% of production costs of the average gold miner are closely linked to energy prices. This is in line with the findings of part I of our gold price framework which showed that a 1% change in longer dated energy prices impacts gold prices by about 0.5%.

How does this bottom up analysis tie in with our gold pricing framework? We used our gold price model to analyze how much of the major moves in gold prices since 2001 was driven by changes in longer dated energy prices. Our model predicts that USD610/ozt of the total gold price increase from 2001-2008 was driven by rising longer dated energy prices. In contrast, using the results of our bottom up analysis that energy costs account for about half of gold production costs, the move in energy prices would explain USd570/ozt. We get to similarly close outcomes for other major upside moves as well as downside moves (see Figure 1).

Increase in longer-dated energy prices from 2001-2008

Neither our top down gold price model nor the bottom up analysis presented in this report should be misconstrued as a trading tool. Instead, it is a very useful framework for determining where are in the gold price cycle. Energy prices are clearly one of the most important drivers for gold prices. The bottoming of longer dated energy prices therefore has reinforced the floor for gold prices set by real-interest rates. We believe that the low in longer-dated energy prices is behind us and will likely have to move sharply higher over the long run (will dive deeper into this in the third and last part of this report). This, combined with the view that real interest rates have little upside but a lot of downside from here, plus the persistent risk of new and untested unconventional easing measures by central banks, leave the outlook for gold prices skewed sharply to the upside. In other words, there is a strong asymmetry for the gold price outlook.

The first section of this report looks at the direct energy exposure of gold miners. In the second part, we analyze the indirect costs, using the World Gold Council’s All-in sustaining cash costs (AISC) framework. In the last section we discuss the results.


The CDP (formerly known as Carbon Disclosure Project) is a UK company that collects self-reported data from over 3000 large companies. Among other data, companies are asked to report their detailed energy consumption. The mining companies typically report their direct energy consumption for electricity (from the grid) and fuels, whereby the latter is often broken down into the different type of fuels consumed (some of it also to produce off-grid electricity). We analyzed data for the 25 largest pure gold producers in the world (gold output being 50% or more of annual output by value). Of the largest 25 publicly traded gold producers in the world, accounting for about 36% of total annual mine supply, 18 reported to the CPD for 2016. Polyus Gold was the only large gold producer not reporting to the CDP. However, the company reports its energy consumption independently in the 2016 annual report. The result can be found in table 1.

The data allows to calculate roughly what the energy intensity of the individual companies by dividing the total direct energy consumption in one year by the amount of gold mined. On average, the top gold miners need about 8.3 Terajoules (TJ) per ounce of gold1. However, there are some caveats;

The companies report energy consumption in the form of fuels and electricity. The electricity consumption data is broken down into electricity that is purchased, electricity that is produced from renewable sources and electricity that is produced from non-renewable sources. The latter thus comes from power production based on the fuels the company consumes, which it reports separately. In addition, all energy data is reported in Terajoules (TJ). Fuels such as petroleum products and coal have an energy content called “calorific value”. It’s the amount of energy that is in a barrel of oil or a tonne of coal. However, when fuel is used to produce electricity, a lot of energy is lost in the process. Hence, a gold mining company that is producing its own electricity will consume a lot more energy in the form of fuel to produce the amount of energy in electric form it reports to the CDP. In other words, two companies could use the same amount of energy per ounce of gold mined, but because one produces its own power and the other purchases it from a 3rd party, the latter company would seemingly consume less energy. Hence, the data is not suitable to compare energy per ounce mined between companies, but rather to look at an average energy consumption across the industry.

Hence, the data itself has to be handled and analyzed with care. However, we found that once we translated the energy consumption into costs, the data matched largely with how much the companies reported their energy costs indeed are, both to the CDP (only the very largest companies reported those estimates) as well as in their annual reports.

energy consumption of largest gold mining companies

In addition, the gold mining companies we analyzed tended to use a similar energy mix over time. Hence, even as the data does not allow for comparing the energy consumption of different companies with each other, it does allow one to analyze the energy consumption per ounce mined of a company over time. At this point we only have comprehensive data for a few producers (luckily the largest) and only going back to 2011. (Earlier data is available but, in many cases, it is inconsistent with the current reporting framework). What the data shows is that, despite the continual efforts of gold producers to reduce their energy consumption, the amount of energy consumed to produce an ounce of gold has been trending up (see Figure 2).

The data reveals that average energy spent per ounce of gold produced has been going up from 2011 to 2013, declined in 2014 and has since rebounded and reached a new high. In our view this reflects mainly two things:

1. Rising energy intensity is consistent with declining ore grades in the mining industry (copper, zinc, nickel, as well as oil production where non-traditional forms of oil production such as oil sands or shale oil are much more energy intensive per barrel of oil output than conventional oil fields). This also makes intuitive sense as the mining industry should be exploiting cheaper sources before moving on to more expensive ones and given the importance of energy for operating costs. There is naturally a link between cheap/expensive and low/high energy intensity. Hence, we expect that over the long run, the energy intensity of gold mining will increase.


2. Rising gold prices incentivizes energy intensive mining and vice versa. Very energy intensive ore bodies that were uneconomical to mine in the past became suddenly economical when gold rose to USD1670/oz on average by 2012. In 2013 prices began to correct sharply from their highs which in turn made mining these ores uneconomical again which probably led to increased high grading. As a result, the average energy consumption per ounce of gold mined declined slightly. However, as prices have since resumed their long term upward trend, we expect gold miners to increase their energy consumption again in order to maximize output.

As time goes by and we get more data, it will be interesting to see how energy intensity evolves over the long run. On one side, we expect ore grades to continue to decline; on the other hand, gold miners will continue to drive efficiency.

Energy intensity of gold production

The cost of direct energy exposure

Most companies report their direct energy costs directly to the CDP. On average, it’s around 20% of total operating costs for 2016, the most recent reported year. However, in previous years, when energy prices were higher, some companies reported direct energy spending of 30% or even more of total operating costs. We then tried to estimate energy costs based on the reported energy consumption data. Because of the very diverse energy mix of each company as well as huge discrepancies in local commodity prices (e.g. a ton of coal delivered to a mine in Australia has a very different price then a ton of coal in China), any calculation will inevitably fall short of the real costs a miner has. As a proxy, we used the average cost of a barrel of Brent oil and multiplied it with the energy consumption of each company. In most cases, the results are in the same ballpark as what the companies have reported themselves and on average both were around 20% in 2016 (see Table 3).

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Gold Money

For most of my 40 years in the finance industry, I have been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced me that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, my mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.