08/09/2014 - 11:38

Getting back to business as reality check changes outlook

08/09/2014 - 11:38


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FEATURE: If the adage ‘three strikes and you’re out’ applied to the gold mining industry, the curtains would already have been drawn; but some determined locals are fighting on.

Getting back to business as reality check changes outlook
RECALIBRATE: Les Davis says Silver Lake has made some tough business decisions in light of the lower gold price. Photo: Attila Csaszar

More business, less mining.

In a nutshell that is the state of Western Australia’s gold mining industry, which has been whacked by a falling gold price, bruised by rising costs, hammered by a high exchange rate and now faces the prospect of a fourth strike – higher government royalty rates.

Some mines, unable to withstand the onslaught, have closed. Without a change in conditions, others are likely to follow.

International gold producers able to dodge the local problems – including some of the world’s highest wage costs and an Australian dollar that refuses to fall against its US cousin – have sold local assets or simply walked away from WA.

One positive from the departure of the international miners is the creation of an opportunity for local miners to buy back the farm, a process led by the new leader of WA gold, Northern Star Resources, which has secured four previously foreign-owned mines.

The Northern Star plan is to buy assets at a time its management team believes are as low as they are likely to go, and then work hard to trim costs, boost production and accelerate exploration to catch a possible rise in the gold price next year – or enjoy the benefits of a falling Australia dollar (or both).

Whether the price rise comes, or whether the dollar falls, is the risk in the Northern Star plan, with much depending on the mood and decisions of the global gold industry’s most important person, Janet Yellen, chairman of the US Federal Reserve System.

What Ms Yellen decides to do with US interest rates is critical to the outlook for gold, with the widely expected increase in rates likely to extend the tough times.

With so much bad news infecting the WA gold industry it’s hard to find much positive to say, but there are flecks of positivity if you look hard enough, and dig beyond the historic performance indicators (tonnes mined and ounces produced).

Today’s critical metric is the cost per ounce, because that’s the only factor that gold miners can control. Everything else is in the hands of external forces – a fact the gold industry has traditionally chosen to ignore.

Reality for the gold sector has dawned, and one man who knows exactly what that means is Les Davis, a local industry leader who took Silver Lake Resources on to the Australian stock exchange on November 14 2007, and remains chief executive of the company.

The listing date is important in understanding where the gold industry has been during the past seven years, and where it might be going.

On the day trading started in Silver Lake shares in 2007, the gold price was $US808/oz, and the Australian dollar exchange rate was US61.5 cents, which meant the local gold price was $1,313/oz – not far below its latest price of $1,379/oz.

With the local gold price high on float day it was hardly a surprise that Silver Lake’s 30-cent shares opened for trading at 49.5 cents and, after a few sputtering years, rushed to an all-time high of $3.96 in October 2012, when the gold price was above $US1,700/oz, and the Australian dollar exchange rate had rocketed up to $US1.02.

To say the period between 2007 and 2012 were the good old days for WA gold miners is an understatement, but they were conditions that led to the management team at Silver Lake, and every other gold mining company, to believe that the good times could last forever – which they obviously have not.

Everyone in WA gold would have felt pretty clever on the way up; but they were living in a fool’s paradise, because what the gold price gave in 2012 the gold price took away in 2013 – and has continued to take away this year.

From its stellar days of almost $4 a share, Silver Lake today is trading at around 43 cents, a price fall of close to 90 per cent.

The latest share price reflects a net loss of $170.4 million for the latest financial year, a heavy blow given that the company incurred a loss of $319.3 million in the year before.

No-one at Silver Lake is happy with what’s happened during the past two years, but somewhat curiously the current plan at the company makes a lot more sense from a business perspective than the growth-at-all-costs plan during the boom years.

“We’ve had a wake-up call,” Mr Davis told Business News.

“The lower gold price has forced us to make some very tough decisions, and we’ve made them.

“Our financial performance needs to be seen in the context of our Murchison mines and the Lakewood mill being placed on care and maintenance.

“Going forward, we’re mainly focused on the Mount Monger operations, which are performing well.”

What Silver Lake has done is trim its business to fit the market. It is no longer seeking to expand without first looking closely at the business case to justify expansion, and it has cut costs to a point where it can trade profitably, albeit at a reduced size.

From being a company operating three processing plants and seeking to develop two new mining centres, Silver Lake has contracted back to one plant being served by several mines centred on the Mount Monger district south-east of Kalgoorlie.

A planned development of mines in the Murchison has been shelved. A planned mine development at Kundip near the south coast has been slowed, and the Lakewood processing plant where the company started life in 2007 is for sale.

Rather than chasing a production target greater than the 217,000oz produced in the 2013 the new target is 125,000 to 135,000oz, an achievable and profitable objective that could secure Silver Lake a potential doubling in pre-tax earnings despite a big reduction in revenue.

“We’ve dropped a fill-the-mill approach and we’re focusing on producing profitable ounces and delivering the profits that shareholders deserve,” Mr Davis said.

For a company that is Kalgoorlie to its steel-capped boots, the new approach is revolutionary and a welcome recognition that mining is just another business and must follow the same disciplines that apply to all forms of business.

Costs have to be controlled and growth for growth’s sake is a poor business plan that might please management while growth is easy, but invariably costs shareholders dearly.

What Silver Lake has recognised is that gold mining is a price-taking business. There is no scope for value adding.

This new and more disciplined approach will make Silver Lake a less exciting business than it was in the boom years, but it should also ensure that it survives the down years.

In a sense, Silver Lake expanded too quickly only to be savaged by the gold-price slump.

Northern Star, the new star of the WA gold industry, is expanding during the gold-price slump and might, with luck, emerge a winner.

Timing, as they say, is everything in business – and gold mining is just another business.


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