30/09/2010 - 00:00

Precious metal is a golden contributor to the Western Australian economy

30/09/2010 - 00:00

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WA is having a gold renaissance, with exciting new areas in the far reaches of the state being opened up to exploration.

Precious metal is a golden contributor to the Western	Australian economy

When Newmont Mining re-opened the $US2.8 billion Boddington gold mine last year, it commissioned what will become Australia’s largest gold mine.

With output scheduled at a whopping million ounces a year, it proves that nearly 120 years after the gold rush, the precious metal still plays a significant role in the Western Australian economy.

But in those years since Arthur Bayley and William Ford discovered 554 ounces of nuggets near Coolgardie, surprisingly little has changed. While the ounces produced may now be in the six- and seven-figure realm, the locations and names of mining operations are much the same as they were in the late-19th century.

Apart from Boddington (130 kilometres southeast of Perth) and Telfer in the remote eastern Pilbara, most gold mines still radiate north and south from Kalgoorlie’s ‘Golden Mile’ in an area geologists prefer to call the Wiluna-Norseman greenstone belt.

And while combined output from mines in the Goldfields region is much higher than any other province in the state, Boddington and Telfer have the highest production forecasts.

Denver-based Newmont Mining owns Boddington, which also produces a considerable amount of copper.

Large firms that operate across multiple continents control the biggest mines in the state.

Newcrest Mining, Australia’s largest homegrown gold company, owns Telfer.

Newmont and Canada’s Barrick Gold own Kalgoorlie’s Super Pit in a 50-50 joint venture.

South African companies Gold Fields, with the St Ives operation, and AngloGold Ashanti, with Sunrise Dam, are the fourth and fifth largest gold producers in the state, as detailed in the WA Business News Book of Lists (see page 16).

According to Melbourne-based gold industry consultants Surbiton Associates, total Australian gold production for 2009-10 was up 11 per cent on the previous year, to 245 tonnes.

Surbiton director Sandra Close said the increase was due to three factors.

“First, several long established producers significantly increased output and had an excellent [June] quarter,” Dr Close said.

“Second, there was higher output from operations commissioned in earlier quarters that are still in the ramp-up phase. These included Boddington, Frog’s Leg and Carosue Dam.

“Third, several new or recycled operations joined the producer ranks. Edna May and Bronzewing in WA and White Dam in South Australia were notable additions.”

The vast majority of Australia’s ounces come from WA, which has the only mines that regularly produce more than 400,000oz per year.

Apart from the big 5, the majority of gold producers in the state are Perth based, ASX listed, single operating asset companies.

But Perth is also home to a large number of junior gold companies, many with assets in other gold regions of the world, including West Africa, Southeast Asia and North America.

Boddington initially operated as an open pit from 1987 to 2001 and had three owners: Normandy Mining, Acacia Resources and Newcrest.

Newmont came to own two-thirds of the then defunct mine through a takeover of Normandy in 2002 and the purchase of Newcrest’s interest in 2005.

AngloGold Ashanti claimed the remaining 33.3 per cent through a takeover of Acacia Resources.

The companies drilled and identified a new, large resource at the project, paving the way for its second life as a multi-million ounce deposit.

Months before first production in early 2009, AngloGold sold its holding to Newmont for about $US1.1 billion.

AngloGold’s rationale for pulling out when cash flows were imminent was its focus on other operations, including the Tropicana project, which is being touted as the next-generation large gold mine in WA.

With the production increase expected from Boddington, Newmont will claim top spot among gold producers in WA, eclipsing Barrick in upcoming years.

A slight setback, from unexpected gold grade differentiations, will keep Newmont from the one million ounces for a couple more years, but with a 20-year mine life, Boddington will be the benchmark for Australian gold mining for a long time.

Other Newmont assets in the state include the Jundee underground mine near Wiluna, which produced 413,000oz in 2009 at a relatively low cost of $US331 per ounce.

The Super Pit, Kalgoorlie’s iconic and omnipresent mine, in the past often competed for mantle of Australia’s top gold mine, producing 600-700,000oz annually.

Barrick and Newmont own equal-share of the project, which was born out of consolidation of historic and operating underground mines east of Kalgoorlie and Boulder in 1989.

The mine is based on the Golden Mile, nicknamed the ‘richest square mile of gold on earth’, which has produced more than 50 million ounces since its discovery by Paddy Hannan in 1893.

The state government recently approved the extension of the mine from 2012 to 2017, which could see it increase in size to 3.9 kilometres long, 1.6km wide and 500 metres deep.

Nearby, Barrick owns the Kanowna operation, consisting of three underground mines that produced a combined 284,000oz in 2009.

Further north is Barrick’s Yilgarn South operation, made up of the Granny Smith, Darlot and Lawlers mines, accounting for 352,000oz in 2009.

The underground Telfer copper-gold underground mine, owned by Newcrest, produced 689,000oz in 2009-10, more than any other Australian operation in the same period.

Newcrest used to hold interests in a swathe of operating assets across WA, but is now making trails into southeast Asia and recently completed a $10 billion takeover of Lihir Gold, which owns a large mine in Papua New Guinea.

But Telfer will be an important part of its portfolio for a long time, with more than 13 million ounces in reserve.

About 50km south of Kalgoorlie, South Africa’s Gold Fields owns the St Ives operation.

Situated right in the middle of the Kambalda nickel province, the gold mine produced 421,000oz in 2009-10.

Supplemented by 165,000oz from the Agnew mine near Leinster, Gold Fields has a strong set of assets in WA, which account for about 17 per cent of its global output.

South Africa’s other large gold miner, AngloGold Ashanti, owns the Sunrise Dam mine near Laverton.

The gold deposit was discovered 1988 and mining began as an open pit in 1995.

In 1999, AngloGold acquired the mine through a takeover of Acacia.

Now operating both open pit and underground, Sunrise Dam produced 401,000oz last year.

Further east lies Tropicana, AngloGold’s exciting prospect, which was discovered in 1995 by nickel miner Independence Group.

Independence was doing base metals exploration in the remote region 330km northeast of Kalgoorlie when it unexpectedly came across gold mineralisation.

Further testing signaled the major discovery of an entirely new gold province. Indeed, it has since been recognised as Australia’s only gold discovery of significance in two decades.

Knowing they had stumbled on something huge, and requiring a company with big cash reserves and gold acumen, Independence brought in AngloGold, which purchased a 70 per cent stake.

AngloGold chief Mark Cutifani told the recent Diggers and Dealers conference that the $600 million mine development should get approval later this year.

With a feasibility study nearing completion, commissioning is scheduled for 2013 based on a resource of more than five million ounces of gold, with forecast average production of 330,000-410,000oz per annum over 10 years.

So it’s likely that Australia’s next large gold mine will be in a far-flung region of the state.

AngloGold is doing much of the hard work, developing an airfield, roads, power systems and other infrastructure that will open up the Tropicana province to exploration companies.

But the case of Tropicana proves that if WA wants to retain its claim as a top global gold producer, companies will need to head further east, much like Ford and Bayley did in 1892, into the massive underexplored regions of the state.

The cost of this, however, is prohibitively expensive for most.

Which leads to the argument that the federal government should to do more to incentivise mineral exploration, a cause that the mining industry (particularly junior companies) has been pushing for years.

A flow-through share scheme has worked in Canada, where exploration is promoted through a lower-tax bracket on equity investment in junior resources companies.

That’s not to say that mid-tier and junior gold miners can’t thrive in the current environment.

Up and coming miners

While large multi-national firms control the state’s biggest gold mines, single producing-asset companies own more than a dozen.

Ahead of the pack is Avoca Resources, which owes as much of its success to organic growth as it does to recent consolidation activity.

The company’s flagship is the Higginsville operation, between Norseman and Kambalda, which it delineated and developed.

In 2009, Avoca made a successful bid for Dioro Exploration, which owned a processing plant and gold mines near Kalgoorlie and Coolgardie.

Avoca overcame a rival bid from nearby gold producer Ramelius, and reluctance from the Dioro board, to complete the hostile takeover.

Dioro’s producing assets had been split into two operations: South Kal and 49 per cent of the Frog’s Leg mine.

The South Kal mines and plant were purchased a couple of years earlier from South African gold miner Harmony, as it retreated from Australia to focus on its troubled domestic mines.

Avoca now plans to do extensive exploration work at South Kal to produce 400,000oz across all its mines by 2013.

Hartleys senior resoures analyst Andrew Muir said revamping of old operations around Kalgoorlie was a significant recent development in the industry.

“We’ve seen the re-emergence of the junior Kalgoorlie gold sector in recent years,” he said.

Along with Avoca, Mr Muir named Silver Lake Resources at the Daisy Milano mine, Focus Minerals at Coolgardie, Integra Mining at Randalls, and Catalpa at Edna May as examples.

“That sector’s really come on strong and most of those companies have performed quite well on the back of good results and production and finding new deposits,” he said.

“That’s been one of the key outstanding features of the WA gold sector.”

Mr Muir said he expected consolidation to continue, with many junior and mid-tier companies wanting to fill the gap left by Lihir’s takeover.

“Avoca seem to be the main instigator in the [mergers and acquisitions] sphere,” he said.

“There has been quite a sizeable vacuum left by Lihir and a lot of companies are trying to increase their production to get into that space so that they get a re-rating from the market.

“You would expect that the two drivers in terms of M&A would be strategic benefits, as well as the overall growth to get companies on more investor’s radars.”

Not far behind Avocain terms of production is St Barbara Mines, which owns the historical Gwalia mine near Laverton.

Gwalia, established in 1896, was once managed by a 23-year-old American mining engineer named Herbert Hoover, who went on to become the US president during the Great Depression.

St Barbara bought the distressed asset from bankrupt Sons of Gwalia in 2005, and focused its attention on outlining a new underground resource: Gwalia Deeps.

Gwalia is on track to produce 350,000oz per annum by 2012. This, along with St Barbara’s smaller Marvel Loch mine near Southern Cross, gives it a strong position in the state gold mining scene.

Making up the majority of gold mines are smaller operators, many with aspirations to produce 100,00oz a year.

Close to the mark is Crescent Gold with its Laverton operation. The company has an agreement with Barrick whereby its delivers ore in parcels to the Granny Smith mill for processing.

Crescent managing director Roland Hill said the latest extension to the agreement with Barrick would result in 100,000oz of gold being processed from Laverton in 2010-11.

Saracen Mineral Holdings, at the Carosue Dam mine, and Catalpa, at Edna May, both forecast 100,000oz this financial year.

Saracen purchased Carosue Dam, 120km northeast of Kalgoorlie, from St Barbara in 2005 and poured its first gold in January. Edna May is located near the Wheatbelt town of Westonia, and has previously been mined three times since 1911.

Also commissioned recently was the Mount Morgans mine, owned by Range River Gold, which will send its ore for processing at Granny Smith.

Regis Resources started production at the Duketon mine in August, aiming for 90,000oz a year.

The most recent gold mine to start production was Randalls, owned by Integra, which poured its first last week.

Located east of Kalgoorlie, Integra aims to produce 90,000oz/year from Randalls by 2012.

Companies producing below 100,000oz include Silver Lake; at Daisy Milano, Ramelius Resources; at Wattle Dam, Focus; at Coolgardie, and Tanami Gold; at Coyote.

Production setbacks

But it’s not all good news for the sector.

There are plenty of examples of local gold companies that have been in production, only to be bankrupted by failed mine plans or bad hedge books.

A week ago, Navigator Resources suffered a setback in its efforts to revive the difficult Bronzewing gold mine near Leinster.

Bronzewing sent its previous owner broke.

Prospector Mark Creasy, who netted $115 million when he sold it to Great Central Mines, discovered the deposit.

Joseph Gutnick, owner of Great Central, oversaw opening of the mine in 1991, and it averaged more than 230,000oz per year until 2004, twice changing owners; first Normandy then Newmont.

View Resources purchased Bronzewing in 2004 from Newmont for $9 million and planned a 2007 restart targeting underground and open-pit ore.

Less than 12 months after pouring its first gold, View announced that it had hadn’t hit the grades it anticipated and the company went into administration.

Navigator swooped in, picking up the suite of assets in 2009, with a plan to ignore the difficult underground ore and produce 100,000oz from open pit sources only.

But last week, five months after first production, Navigator announced that a pit wall had collapsed.

On Monday the company said it had resumed mining and clean-up costs would be up to $1 million. While September quarter production was expected to fall short, Navigator said it would alter the mine plan to maintain forecast production of 101,000oz this financial year.

Norseman Gold is another producer reviving a troubled mine. It operates the namesake mining operations, which it purchased in 2007 after previous owners Croesus went into administration. Norseman holds claim to being Australia’s longest continually operating gold mine.

But Croesus failed as owners, brought down by forward gold sales and an inability to meet its financial obligations.

But the mine is now back up and running, with London- and ASX-listed Norseman forecasting production of 100,000oz per year.

A recent victim of poor mining grades, where the amount of gold included in ore didn’t meet expectations, was Monarch.

Monarch owned a suite of deposits around the Goldfields, centred on a processing plant at Davyhurst.

Davyhurst was also a previous-Croesus asset but had a series of owners prior, all of which had a different strategy for mining the associated deposits.

Croesus mined from 2001 to 2005, producing 387,000oz, before Monarch took control.

Monarch, under the guidance of former Croesus chief Michael Kiernan, revived the operation, pouring gold in August 2007.

But within a year, those plans were struck down by underperformance and Mr Kiernan couldn’t secure funding to cover Monarch’s debt, pushing them into administration.

He used another vehicle, Stirling Resources, and pledged his own money, to hold onto the assets, which are now controlled by Swan Gold Mining. Mr Kiernan left the Swan board in June.

Finally, the downfall of Sons of Gwalia is one that had a big impact on the WA gold mining scene.

Sons of Gwalia was Australia’s third-largest producer, and the global leader in tantalum production.

The company was founded in 1981 by Chris and Peter Lalor, descendants of Peter Lalor, leader of the Eureka Stockade rebellion at the Ballarat goldfields in 1854.

It listed on the ASX and focused on reviving the Gwalia mine, which had been idle since 1963.

The company built up a holding around the Goldfields and near Southern Cross and regularly produced in excess of half a million ounces a year.

But it was the 2001 takeover of Pacmin Mining, which gave it control of the Tarmoola mine near Leonora, and a an unfavourable hedge book which would lead to its collapse.

Sons of Gwalia paid $210 million for Pacmin, and struggled to recoup the cost. Problems were exacerbated by a pit wall failure at Tarmoola in early 2004, which led to the closure of the mine later in the year.

Sons of Gwalia went into administration, with debts of more than $800 million.

St Barbara bought the Marvel Loch mine, Gwalia, Carosue Dam and Tarmoola for $38 million while private company Talison purchased the tantalum assets.

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