There may be old gold in them thar hillsFont Size: Decrease...

There may be old gold in them thar hillsFont Size:

Decrease Increase Print Page: Print Sarah-Jane Tasker | June 23, 2008
ANOTHER gold dream -- this time the Davyhurst mine -- has bitten the dust.

Gold may be an Australian love affair that stretches back to the early 1800s, and rivals only the bottle and gambling in our affections, but attempts to revive the country's historic mines have tended to come a cropper -- even at today's high metal prices.

Australia's gold industry is languishing at a time of record highs with a sorry list of failed ventures, depressing results on the exploration front and no end in sight to the spiralling costs.

While the resources industry is reaping the benefits of a China-led boom, attempts by the industry to reignite mothballed operations have proved disappointing on many fronts.

Monarch Gold is the latest company to join the growing list of miners that have failed to revive a historic operation.

It is believed Monarch's quest to breathe life into Davyhurst most likely failed because of its insistence on getting it into production as early as possible, despite the difficult nature of the geology at the project, which is about 100km northwest of the West Australian Goldfields capital of Kalgoorlie-Boulder.

Monarch had picked up the asset from Croesus Mining, which ran into its own problems in 2006 when it headed into administration after reporting a net loss of $27.38 million for the first half of 2005-06 after the mines produced less gold than anticipated.

BGF Equities analyst Warrick Grigor said in a recent research note that investors had been presented with a number of walking-dead gold companies over the past few years.

"Companies have been fooling themselves, and misleading investors, into believing that they can pick up discarded gold projects that have been shut down for reasons of economics in the gold sector, and miraculously breathe life into them," Mr Grigor said.

"Yes, the gold price has risen strongly but so have capital and operating costs. The biggest challenge to the gold sector is the ability to find staff and keep them, at reasonable cost. Throw on top of that the impact of rising diesel prices for both trucks and power generation, and most projects have their back against the wall if they are hoping to start up on remnant ore resource positions," he said.

Bendigo Mining is one operator attempting to rise from the ashes, after it disappointed shareholders early last year with news it was shutting down production because of low ore grades.

The company did not go into administration, as was reported last week.

The Victorian gold miner had sunk $300 million into developing its Kangaroo Flat underground mine but was forced to write down the value of its assets by between $90 million and $210 million, sending its full-year result deep into the red.

In an attempt at another bite at the cherry, Bendigo Mining announced last week that trial processing had commenced at its Kangaroo Flat plant.

During the past year, the company has conducted underground exploration from the mine targeting the more productive parts of the goldfield, as well as introducing a visual grade range estimation method. This work has resulted in the discovery of several new reefs.

Managing director Rod Hanson said it was time to "go back to basics" to assess the quality and quantity of the body.

He said there had previously been an over-estimation of reserves in the ground and that it was a tonnage issue rather than grade. "We thought the rigs were bigger than they were. The drill results were interpreted wrong," he said.

Mr Hanson said the miner was quick to change its exploration strategy and went back to the basics to look carefully at the geology of the drill holes.

Reverting to the basics might help some miners in their endeavours, because in its gold glory days Australia was once biting at the heels of South Africa to take the No1 spot as the world's top gold producer, but it has slipped down the ladder and now sits behind the US.

Industry analysts believe the long list of miners failing in their attempt to launch on the gold ladder has hurt the nation's world standing.

Tim Cruse, senior private client adviser at Kalgoorlie stockbroker Patersons, said the sector was clearly struggling with increased costs and lacked investor interest.

"You would expect with the gold prices we have, there would be a lot more interest in the sector but there isn't. It's not easy out there and we're not seeing an increase in production," he said.

"The end result is the gold price needs to rise again to outperform rising costs."

Back in 2004, West Australian miner Sons of Gwalia was placed in the hands of administrators after it incurred more than $800 million in debt. Before its collapse, the company was regarded as Australia's second-biggest domestic gold producer, with operations in Laverton, Leonora and Southern Cross.

The mine was a victim of its former owner's hedging bungles that left the company unable to make the gold deliveries required by its forward contracts.

And in February this year, gold producer View Resources went into voluntary administration after disappointing results from its Bronzewing gold mine in Western Australia.

The company, which thought it had a bargain when it bought Bronzewing for $9 million from Newmont Mining, had warned that production at its flagship mine was about 6500 ounces in January, down from an expected 10,000 ounces.

But not all historic mines kick-started back to life have faced the chopping block, with West Australian mine Silver Lake Resources reporting early success of its takeover of Perilya's Daisy Milano project.

Managing director Les Davis said the main thing Silver Lake had changed since bringing Daisy Milano back into production was the mining method.

"The previous owners used a bulk mining method amenable to thicker styles of mineralisation," he said. "Due to the narrow high grade nature of the mineralisation, Silver Lake is utilising a selective mining method that maximises mined grade and minimises dilution. Our driver is ounces and margin."

Mr Davis said the key was to select the appropriate mining method for the style of deposit, which was the approach it had adopted.

Silver Lake is currently carrying out a pre-feasibility study on its Murchison assets that contain 700,000 ounces in resource -- that mining centre ceased mining when Gold was $400 per ounce.

Mr Davis said that, given gold was trading at record levels, it was time to run the "slide rule" over the entire resource base, to understand what was economic and when projects could be bought into the production pipeline.

"I believe the gold price will stay at current levels for the foreseeable future. Mine supply is decreasing and global demand is increasing, which should be a recipe for sustained high gold prices and hopefully resurrection of many more goldfields that were closed down due to low commodity prices and unsustainable production costs."

But Mr Davis also warned that input costs were increasing across the board, which would remain a management challenge.

Mr Grigor said Silver Lake had a reasonable degree of certainty over the next two years but beyond that it needed to kick some goals. "It needs to rise above the perception of small scale or subsistence mining in order to inspire and attract serious buying in the market. Nevertheless, if the budgets are met, it represents sound value now," he said. With record prices, the gold industry needs a modern-day hero to bring some life back into the sector, perhaps "Twiggy" Forrest-style.