There are some major problems with far reaching ramifications for Western Australia hidden beneath the bright veneer of a gold price at record levels.
There are some major problems with far reaching ramifications for Western Australia hidden beneath the bright veneer of a gold price at record levels.
There have been no big discoveries in the past seven years, nor are any on the horizon.
New float raisings are at the small end of town and will do virtually nothing to resolve WA’s plummeting exploration spend, which has resulted in a fall in the value of the state’s gold production during the past 10 years.
This is in spite of an extended, steady rise in the gold price, including a near 40 per cent appreciation over the past nine months to more than $US550 an ounce (more than $A745/ ounce).
Ten new gold or gold-related floats, six of them from WA, due to list on the Australian Stock Ex-change over the next two months are hoping to raise $43 million.
Last year, about 50 resources initial public offer floats (IPOs) raised an average of $3.5 million or less, enough for about 18 months’ operations based on current operating costs.
Further, more than half of these IPOs raised funds for less risky, easy to finance, brown field projects (at or near existing or previous operations), and more than 20 per cent included offshore projects.
WA’s gold production was worth $3 billion last year, 7 per cent of world production, but down $100 million on 10 years ago. Not surprising, with mineral exploration down from $250 million in 1997 to about $150 million currently, the gold sector’s share slid from $155 million to just more than $60 million in the same period.
The 10 biggest gold projects in WA produced more than 110 tonnes last year, ownership of these projects being split between among the world’s top six gold companies – UK- or US-based companies such as Newmont Mining, Barrick Gold, Anglo Gold Ashanti, Placer Dome and Goldfields.
Australia’s leading locally listed gold miner, Newcrest Mining, recently sold its stake in the Boddington gold project, 100 kilometres south-east of Perth, for $225 million, allowing Newmont to take a controlling 66.6 per cent in the operation and give it the green light.
It is understood cost pressures on Newcrest, caused by delays at its big Telfer gold project in the north of the state and pressure from Newmont and partner Anglo to press ahead with development, contributed to the sale.
The Boddington/Hedges ore body was discovered more than 20 years ago, with the high-grade ore being mined by the Worsley and Alcoa alumina groups before being shut down. Newmont said initial production from the $A1.35 billion project, with low-grade reserves of 11 million ounces, was expected to begin in late 2008 at an average 600,000 ounces a year over a 15 year-plus mine life.
The last major gold discovery in Australia was the multi-million ounce Thunderbox deposit found near Leinster in 1999, and now owned by LionOre Australia.
The mine, containing about 2.3 million ounces and potential for more, went into production in 2002 and produces about 150,000 ounces a year.
Thunderbox is understood to be in the sights of outgoing LionOre Australia boss Mark Ashley, who is planning to leave the Canadian nickel miner at the end of May and perhaps take up the banner as one of the Australia’s major new gold players from those that led the last gold boom in the early 1990s.
Another gold enthusiast to fit the new mould is outgoing Consolidated Minerals managing director Michael Kiernan, who told WA Business News his interest in gold was sparked two years ago when he saw Chinese buying increase.
Mr Kiernan, also chairman of producer Croesus Mining and explorer Monarch Resources, expects there to be increasingly strong growth from India, a view shared by Hartleys resources analyst Andrew Rowell, along with better jewellery uptake in North America and China.
So, in the seven years since Thunderbox and on the back of a rising gold price, the climate has been perfect for several large discoveries.
“The fact of the matter is that large multi-million ounce green field discoveries in Australia require skills, finances and a commitment to research and technology beyond the reach of many small companies,” Carmichael research analyst Paul Adams said.
“The easier, brown fields, walk-up targets close to existing and historical mining centres, provide relatively low-risk options within reach of those companies hoping to capitalise on the gold price in the short to medium term.
“Many companies have recognised these constraints and have actively diversified their exploration portfolios offshore to areas of lower exploration risk, trading this off against higher sovereign (internal, mostly political) risk.”
Mr Adams said the mining environment in some areas previously perceived as being high risk, such as Papua New Guinea, had improved, with junior companies now willing to accept the sovereign risk for the ability to be in “elephant country.”
Mr Rowell said the high gold price had taken some of the pressure off increasingly high operating and capital costs. But small to mid-tier companies were sticking to the low cost options of between 200,000 and 300,000t/year plants producing from 40,000 to 50,000 ounces a year, rather than 1mt/year plants producing over 150,000 ounces annually, he said.
“The banks are still wary of projects on the more marginal side, so any gold project has to get to a critical size to satisfy them,” Mr Rowell said.
There was also the potential in the current environment for mine expansions and reserve increases.
The WA gold industry is also paying the cost of previous boom/busts.
Mr Rowell said that, even if the juniors had the money to spend, they would still have problems accessing drilling rigs, consultants, skilled labour and assay laboratories.
“A few years ago, when things were tight, drilling companies couldn’t get work for their rigs and went out of business. Consultants and geologists also had to look elsewhere. Many are now lost to the industry,” he said.
The gold industry also cites policy impediments within Australia, which make it far less attractive for investment than other countries, as the major cause of the lack of exploration.
The Association of Mining and Exploration Companies (AMEC) points to countries, which have introduced “mineral exploration friendly” policies to reinvigorate their ailing resources industry.
“Canada introduced super flow through shares [tax incentives for investment in exploration companies] in 2000. Since that time, Canada has discovered in excess of 100 new deposits, while Australia reports zero major discoveries,” AMEC CEO Justin Walawski said.
In less than four years, Australia has fallen from first to fifth in the world’s top regions for mineral exploration – its lowest-ever recorded position.
“We have less than a 13-year reserve life for gold and alarming declines in oil reserves. If we do not fix the problem, fuel prices will soar and we face the very real prospect of towns closing down and unemployment in our regional areas as mining companies pack up and leave,” Mr Walawski said.
As far as the gold price is concerned, analysts contacted by WA Business News generally opted for current levels, then were evenly split on slight increases to reducing to $US450/ounce over the next 12-18 months, still well above historical levels.
However, Carmichael’s resources analyst, Gaius King, has tipped between $US650 and $700/ounce within the next 12-18 months on continuing concerns over the growing US current account deficit and US debt, putting the US dollar at risk of a big fall.
Mr King said his view was supported by the fact that US government no longer published its M3 figures on money supply, “because it is running away”.
“The US Treasury is the largest gold holder in the world and it is not selling a single ounce. The giant investment funds are not selling and are expected to buy back into the current market and push the price up further,” he said.
“Gold is no longer just a commodity, it is also a monetary asset.”
