Refining is a vital step in the gold supply chain, but it’s a practice facing increasing competition from within the sector and from technological change.
Refining is a vital step in the gold supply chain, but it’s a practice facing increasing competition from within the sector and from technological change.
There has been a changing of the guard, but plenty of experience remains among the leadership team at the state government-owned Gold Corporation.
Former chief financial officer Richard Hayes has stepped up to lead the organisation as chief executive, while Donald Mackay-Coghill has returned after a spell away to the position of chairman.
Ed Harbuz, who was chief executive officer for 12 years, has retired.
The corporation is Western Australia’s seventh-largest exporter, yet despite it being one of the few profitable state-owned enterprises, Mr Hayes said there was a constant need for improvement, and planned to review the company’s structure and boost its competitiveness.
“We need to manage costs or we won’t be relevant in the future,” Mr Hayes told Business News.
All WA producers refine their product at Gold Corporation’s industrial facility near the international airport, and near neighbours such as Papua New Guinea will also often send their product to Perth for refining.
But it is a surprisingly easy process for miners to do so overseas.
“Gold refining is a global game ... you can fly the doré (semi-pure alloy) anywhere in the world,” Mr Hayes said.
“We have to work hard for every ounce that we get ... that’s all about providing excellent customer service.
“If we’re not competitive … they’ll just find somebody else to refine with.”
International competition is fierce and, unlike bulk commodities such as iron ore, it is simple to transport gold overseas for processing.
India and European nations were among those driving competition, he said.
Refiners in India benefit greatly from that country’s tariff structure, with import duty differentials of around 2 per cent for refined and unrefined product.
As of the end of last year, the London Bullion Market Association had accredited at least 13 refineries in the preceding three-year period.
More than 70 refineries are accredited globally, with China, Japan, the US and Switzerland most prominent.
As a part of a miner’s cost structure, the corporation’s role is fairly small, although it is different from other parts of the supply chain, Mr Hayes said.
“A gold miner’s whole cash flow ends up going through a refiner,” he said.
Going forward, the corporation will be having a close look at its efficiency, to get maximum value from inputs.
The main driver on that is not employment costs, Mr Hayes said, but working effectively with suppliers.
The state government will no doubt be running the ruler over the business, too, as it hunts for potential asset sales to reduce state debt. The refining part of the business was for some time held in a joint venture with Newmont and Johnson Matthey, with the two private players controlling 60 per cent, although it has now returned to the corporation’s hands.
Defensive favourite
Global gold demand was driven upwards by the industrialisation of China and the need for a safe haven after the GFC, although it has softened somewhat this year, according to the World Gold Council.
Demand in the March quarter this year was 1 per cent lower than the same period in 2014, the council reported in its May review.
“Ultimately (gold) is a store of wealth,” Mr Hayes said.
“Notwithstanding that the price has lost some of its shine.
“What gold does ... it’s an insurance policy against everything else turning to mud.
“We’re still finding that our markets have held up relatively well.”
India increased demand around 15 per cent year on year, while Chinese demand fell 7 per cent due in part to what was then a strong stock market, according to the World Gold Council.
“India remains, culturally, a very big consumer of gold,” Mr Hayes said.
Jewellery demand has driven medium-term growth in India, while in China it is seen as a safe place to park money.
“China has been a net buyer of bullion for some years now,” Mr Hayes said.
“A lot of that is going into the official sector.
“As they have diversified out of US dollar assets over time, gold has been an excellent store of wealth for them.”
To that end, the Gold Council noted that March was the 17th consecutive quarter during which there were net purchases by central banks.
High tech
A more recent source of competition for the industry has come from the digital world in the form of bitcoin.
It rose to international attention in 2014, when a dramatic price spike piqued the interest of investors.
Like gold, some people use the digital currency as a hedge against the risk of alternative, conventional currencies, which are controlled by governments.
Mr Hayes was relaxed about the innovation, however. “We don’t see bitcoin as being a direct competitor of ours,” he said.
Although there was a market for bitcoin, Mr Hayes said precious metals had the advantage of being internationally tradeable, and importantly, a physical object that could be held.
“At the end of the day, you’re (with bitcoin) buying an entry in someone’s ledger on a computer,” he said.
