Gold industry suffering from lack of mid-tier firms by:...

Gold industry suffering from lack of mid-tier firms

by: Sarah-Jane Tasker
From: The Australian
March 30, 2012 12:00AM

Jake Klein

Evolution mining's Jake Klein after a speech to the Sydney Mining Club yesterday, when he warned of barriers to investment. Picture: Renee Nowytarger Source: The Australian
Gold

Source: The Australian

AUSTRALIA'S gold industry has been warned it runs a "serious risk" of being perceived as having a declining importance from a global investor perspective because of the lack of a mid-tier sector.

Evolution Mining's chairman Jake Klein, in a speech to the Sydney Mining Club yesterday, said offshore investors often described Australia's gold industry as "high cost, lacking investment opportunities, relatively mature as an exploration region and just not worth the effort".

He said international investors frequently commented that if they wanted gold exposure in Australia, buying shares in Newcrest was their only option, highlighting the absence of a mid-tier sector to fill the gap.

Newcrest Mining is the fourth largest gold company in the world, by market capitalisation, and its value represents 55 per cent of all Australian-listed gold producers: 10 times bigger than the second largest.

Mr Klein said it was clear a huge gap had developed between Newcrest and the rest of the sector, effectively wiping the intermediate players from the Australian landscape -- a space he hopes Evolution will grow to own.

The domestic gold sector may be struggling to fill the gap between the dominant player and the emerging hopefuls but Australia is still the world's second largest gold producer, behind China.

But Mr Klein said only 51 per cent of production out of Australia was generated by Australian Securities Exchange-listed gold companies, with the other half produced by foreign companies.

"And yet these ASX gold companies, if you include what they produced offshore from regions like Africa and Asia, produced 15 million ounces. That means that more than two-thirds of the gold produced by ASX companies has come from mines owned and operated offshore," he said. "We are clearly very skilled and efficient miners, but then why is it that the majority of these companies have tended to stay largely as single-asset companies, with the highest quality ones often being absorbed by foreign competitors? It raises some serious questions about the health and future of the Australian gold industry."

The average cost of discovering gold has jumped, raising the hurdles to entry. In 1990 the average discovery cost of an ounce of gold globally was less than $20. It is now estimated to be between $60 and $80.

"In Australia this trend is even more concerning. According to the latest ABS data, greenfields drilling, which in 2003 made up 45 per cent of the total metres drilled, has fallen to just over 30 per cent," Mr Klein said.

"This means that the source of Australia's new mines is potentially in serious decline and presents a serious threat to the long-term growth of the Australian mining industry."

He said he expected equity and debt markets to remain difficult for the foreseeable future, leading some junior companies with interesting assets to prefer to be part of a group, such as Evolution, rather than pursue a solo mission.

"Australia doesn't have a real globally competitive mid-tier or intermediate gold company, although it's certainly a place which Evolution is aspiring to occupy," he said.