Costs dull gold but future is bright Jamie Freed August 13, 2007
Advertisement AdvertisementDELEGATES to this year's Diggers and Dealers mining conference in Kalgoorlie certainly didn't need to look far for their first glimpse of gold.
Flying into the historic West Australian town, it is only necessary to look out the aircraft window to see the enormous Super Pit mine. The open pit is so large it takes giant 240-tonne trucks about 45 minutes to make their way from the bottom of the pit to the top of the mine.
The famous mine, owned by the global giants Barrick Gold and Newmont Mining, remains the biggest goldmine in Australia, although Newcrest Mining's troubled Telfer mine in the Pilbara is nipping at its heels.
But, despite a rising gold price, like most other Australian goldmines the Super Pit has not been a screaming financial success of late.
The star mines in the Goldfields region in the last year were instead the Kambalda nickel operations owned by up-and-coming miners like Independence Group, Mincor and Sally Malay, which had the foresight to buy ageing operations from WMC Resources at a time of low nickel prices earlier in the decade.
"Everything else has done better than gold," Newmont's vice-chairman, Pierre Lassonde, told Diggers and Dealers delegates in the conference's opening speech, referring to the rapid rise in the prices of other metals since the start of the mining boom.
"But gold's time is coming."
Looking at the Australian industry over the last year, some observers might wonder about his confidence - or at least his impartiality, given Mr Lassonde is the chairman of the leading industry marketing body, the World Gold Council.
"Presently, the vast bulk of Australia's gold producers are facing operational challenges of some sort," said the Fat Prophets analyst Gavin Wendt. "The rising cost of fuel, supplies and equipment, contractors, labour and capital items is putting real pressure on the operating margins of most goldminers. More recently, the strengthening A$ has made the situation even worse."
While their base metals peers have been raking in the profits, BMA Gold, Croesus Mining and Gleneagle Gold have entered administration. A number of other companies were forced to delay their projects when they found rising costs or lower than expected grades suddenly made them unviable.
As Australia's largest goldmine, the Super Pit is emblematic of some of the local industry's problems. In US dollar terms, which is the international standard for the gold price, gold has risen nearly 70 per cent from about $US400 to $US675 an ounce in the last three years. But in Australian dollar terms, the gold price rose only about 40 per cent from about $550 to $785 an ounce during the same period due to the rising local currency.
In the meantime, production costs have risen strongly as well. Barrick Gold's cash production costs were 38 per cent higher at its Australian and Papua New Guinea operations last year than in 2005. Newmont's costs in Australia and New Zealand rose 18 per cent in the second quarter this year over the same period last year. Overall, global gold cash costs have nearly doubled since 2001.
Barrick's Australia-Pacific president, Joc O'Rourke, said the Super Pit was clearly becoming a higher-cost operation, although the world's largest gold producer still considered it a "good mine". He noted Barrick had hedged much of its exposure to the Australian dollar at lower rates.
Newmont, which is famous in the industry for its virulent anti-hedging policy, is taking another look at its exposure to the Australian dollar in light of recent gains. Some Australian companies have decided the best way to avoid the rising local cost of producing gold is to seek overseas projects.
During a conference presentation, Sino Gold's chief executive, Jake Klein, explained how much cheaper it was to develop a project like his company's Jinfeng mine in China.
He noted open pit mining costs were one-third the Australian rate and the salary of a skilled mining operator was about one-fifth of the equivalent Australian labour. He added that Australian production was at the lowest level in 15 years, and China had recently overtaken Australia as the world's third-largest producer.
Other miners like Lihir Gold, Oxiana and Kingsgate have also taken advantage of overseas opportunities to the benefit of their share price.
But global gold miners like Newmont, Barrick and AngloGold Ashanti are still committed to building projects in Australia, where the lower political risk helps offset the higher costs as part of the companies' larger portfolio.
Newmont and AngloGold are developing the $1.9 billion Boddington project in Western Australia. At its peak production of 1 million ounces a year starting by early 2009, Boddington will overtake the Super Pit and Telfer to become Australia's largest goldmine.
While the Boddington project is certainly exciting, it is a "brownfields" project, given there was previously an operating mine on the site. Newcrest's Telfer mine was a similar development. As Mr Lassonde told delegates, most of the world's biggest goldmines were discovered in previous decades.
"Look at the exploration expenditure," he said.
"It's going up, but we're not getting the discoveries. Not only are we not finding them, but the ones we do find, they take forever to get into production."
The most recent exception to the rule in Australia appears to be the Tropicana project, a joint venture of AngloGold and Independence Group.
"Tropicana is a classic case of finding a new ore body in a new area," Independence's managing director, Chris Bonwick, said.
WMC had surveyed the area - in the Great Sandy Desert about 400 kilometres north-northeast of Kalgoorlie, hoping to find nickel. Geologists found some anomalous gold values underneath the sand, but the company was not really interested in the yellow metal at the time.
Once Independence looked over the historical data and drilled the tenements, it quickly hit paydirt. The project became so big it needed to bring in the South African miner as a partner. AngloGold does not expect to release a resource statement until later this year, but based on its forecast initial production of about 300,000 ounces a year, it seems clear there are at least 3 million ounces of gold at Tropicana.
The first stage of Tropicana will cost between $100 million and $1 billion to develop, but the partners reckon there could be more mines to come. "At this stage we haven't even closed off the pit," Mr Bonwick said. "It's just getting bigger and bigger."
And if Mr Lassonde - undoubtedly the star speaker of this year's Diggers and Dealers conference - is correct, Tropicana and other up-and-coming Australian gold developments will be perfectly placed to benefit from improved gold market conditions in the coming years.
In his bullish opening speech, he predicted the gold price would "have three zeros after the first number" before the end of the current cycle. "I think this bull market will be a lot longer than we think," he said.
