Gold's recovery tarnished by cost pressures

For many years the mainstay of Western Australia’s mining industry, gold has increasingly been overshadowed by iron ore, nickel and petroleum, which have been the focus of exploration dollars and overseas investment projects.

Consolidation within the gold sector over the past five years has reduced the number of independent producers in WA almost by half as the list of casualties, including Sons of Gwalia, Croesus Mining and Gleneagle Gold, began to mount.

In recent months, however, investors have been returning to gold, which is considered a relatively safe haven in times of financial crisis.

Association of Mining and Exploration Companies policy and public affairs manager Ian Loftus said that, while the rising gold price had sparked the interest of investors, the sector overall had a low profile compared with other commodities.

“As the gold price is going up there hasn’t been the same level of gold mining exploration as for other commodities,” he said.

“WA is dominated by iron ore, it’s got the China connection, the overseas investment. Gold hasn’t really had that profile.”

Prime Corporate Finance managing director Liam Twigger said more investors would turn to gold in light of the growing risk and uncertainty in global markets on the back of the sub-prime mortgage crisis in the US.

“In times of inflation, gold is performing its traditional role,” Mr Twigger told WA Business News.

He believes that, while the gold price has pulled back momentarily to the mid $US800s, it still has significant upside and could break through the $US1,000-$US1,200 mark over the next few years.

“We’re five years into a very good boom market, and we’ve got another decade to go,” he said.

For the local gold industry, there is concern over the lack of new discoveries and low investment in greenfields exploration, with most producers currently exploiting old mines and exploring around existing deposits.

The exception was the discovery of giant Tropicana deposit near Leonora by South African gold miner AngloGold Ashanti and its WA-based joint venture partner, Independence Group NL.

Mr Twigger believes there still is real potential from deeper drilling.

“100 million ounces have been produced in the Coolgardie/Yilgarn craton in the first 100 metres, and there should be a similar endowment at depth,” he said.

Today, despite the growing number of WA gold companies bringing production on stream, the state’s gold sector is dominated by multi-national mining giants, with AngloGold Ashanti, Barrick Gold and Newmont Mining the state’s top producers.

The Kalgoorlie Super Pit, jointly owned by Barrick and Newmont, remains the largest gold producer in the state, with output of 648,000 ounces in 2006-07, closely followed by Newcrest’s recently developed Telfer mine at 627,000 ounces.

They will be overtaken in the near future by the giant Boddington gold mine, which is expected to be completed in late 2008/early 2009 (see next page).

Gold explorer Apex Minerals NL managing director Mark Ashley said the high costs and risk associated with developing new projects meant gold companies, particularly the juniors and mid-caps, were more likely to conduct further exploration around existing ore bodies rather than trying to find new deposits.

This places the major multinational companies at an advantage to smaller players, which would be less likely to raise the capital required.

“With capital cost increases, you need a much bigger project to justify the capital you need compared to five years ago,” Mr Ashley said.

“And the majors are in a better position to put money in and to wait.”

The West Perth-based exploration company was started in 2006 by a group of ex-LionOre Mining executives to acquire and develop numerous refractory gold deposits in WA’s eastern Goldfields region.

The company has total landholdings in the Eastern Goldfields of over 3,800 square kilometres and a gold resource inventory of approximately 2.5 million ounces. It also acquired both conventional and bacterial oxidation processing plants, camp facilities and other valuable infrastructure.

To date, the company has spent close to $60 million in cash and shares acquiring projects, including Oxiana’s Wiluna mine. It also spent about $20 million on exploration and feasibility studies.

With the plant already in place, the company will require an investment of $50 million to get the project going, with production at its Wilsons and Wiluna projects starting by the end of the year at an expected annual rate of 160,000 ounces by December.

Mr Ashley said producers were nervous about using the current gold price in long-term planning, as rising costs and exchange rates threatened to take the shine off improving margins.

“To build a new plant in this environment is a difficult task; it’s expensive and difficult. It’s three times more expensive now than it was five years ago and takes twice as long,” he said.

“Apex’s strategy isn’t centred around an increase in gold price, it’s centred around doubling production by replacing low-grade with high-grade deposits.

“If you’re going in with a higher gold price it’s the cream on the cake.”

The list of WA miners tapping into old mines is extensive: Avoca Resources’ Higginsville gold project was acquired from South Africa’s GoldFields; Regis Resources Ltd acquired its Duketon gold project from Newmont; St Barbara bought $38 million worth of assets from the failed Sons of Gwalia, and Norseman Gold (formerly Davos Gold) bought the assets of Croesus for $71 million.

Among the recent producers to come on stream in WA, Norton Goldfields bought its Paddington Gold Mine at Kalgoorlie from the Barrick Group in August last year, and produced 63,000 ounces of gold during the first 18 weeks of operation to December 2007.

Dioro Resources, which poured 5,678 ounces of gold from its South Kalgoorlie project in December 2007, and sold it at spot for an average price of $942 per ounce, acquired the assets of Harmony Gold on November 2007 for $45 million in cash and shares.

Monarch Gold Ltd acquired its Mount Magnet Gold Operations project from Harmony Gold, including the historic Hill 50 mine, for $65 million last November, as well as the Minjar project from Gindalbie Metals in late 2006.

Mercator Gold, listed on the London Stock Exchange’s Alternative Investment Market, is also among the state’s most recent producers to come on stream in 2007.

With the first gold pour at its Meekathara gold operation commencing in October, Mercator is expected to ramp production to about 120,000 ounces in the first 12 months of operation.

Perth-based chairman Terry Strapp said Mercator was one of the up-and-coming gold companies, which would continue to add to resources and reserves.

Mercator currently has a landholding of 2,000 square kilometers near Meekathara, an area Mr Strapp said supported four individual mining companies 15-20 years ago before it was consolidated.

It also has infrastructure in place, including a 3 million tonne per annum oxide plant and a fully manned 200-person camp.

While it was too early to tell operating costs before the mine goes into full production at the end of February, the pressures of labour and fuel costs are threatening to weigh heavily on margins.

“We’re seeing cost increases in both of those areas,” he said.

But, Mr Strapp said he was confident the strength behind the gold price could push it through the $1,000/ounce mark, making it an undervalued commodity when compared with the performance of base metals.

“We’re surprised it hasn’t gone as well as it should have in the current market. Gold doesn’t seem to have performed compared to base metals,” he said.

Mercator is currently looking at the prospect of a dual listing on the Australian Securities Exchange this financial year.