The main reasons why gold miners typically sell their almost their entire gold production as soon as it comes out of the refinery, rather than stockpiling it, are:
1. Cash flow requirements:
Gold mining is a capital-intensive business with high operating costs. Miners need a steady stream of cash to fund their operations, pay employees, and service debt. Selling gold immediately provides the necessary cash flow.
2. Hedging against price volatility:
Storing large amounts of gold bullion exposes miners to price fluctuations. By selling immediately, they can lock in the current market price and avoid the risk of gold prices declining before they sell. It is like price averaging the selling.
3. Limited storage capacity:
Gold mines and refineries typically have limited secure storage space for large volumes of bullion. Storing excess gold can be logistically challenging and costly. Holding onto gold production instead of selling it would increase storage and security costs.
4. Investor expectations:
Investors and analysts expect gold miners to sell their production promptly and not speculate on gold prices. Stockpiling gold can be seen as an unproductive use of capital.
5. Avoiding inventory risk:
Holding large gold inventories carries risks such as theft, damage, or changes in government regulations. Selling immediately transfers these risks to the buyers.
6. If gold mining companies were to hold their production outputs instead of selling them immediately, it would lead to an increase in their All-In Sustaining Costs (AISC). Gold miners' AISC is impacted by factors like sustaining capital expenditures, mining equipment replacement, and capitalized stripping. The G&A Expenses will increase.
AISC = Cash Costs + Sustaining Capital + Exploration Expenses + G&A Expenses
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