Royalty rise puts damper on gold spend plans

The past 12 months was a period of heightened activity for Western Australia’s top gold miners, with production up and the sector planning $1 billion of investment by June next year.

Of that spend, a large amount is attributable to Newmont Mining, which is planning a big expansion at its Tanami operation, while AngloGold Ashanti and Newcrest Mining have also earmarked big investments in their WA operations for the year.

About 6.3 million ounces of gold was produced out of WA in FY17, up by around 100,000oz on FY16 figures, according to data from the BNiQ Search Engine.

That increase was led by the likes of Saracen Mineral Holdings, Westgold Resources (the spin-out company of Metals X), and Newmont.

However, the good news flowing from a buoyant gold price and pipeline of projects for the period ahead has been tempered by the state government’s proposal to increase its royalty take, as detailed in the McGowan government’s first budget.

Milestones passed

For Saracen, the 2017 financial year was one of significant milestones, as it not only heralded the first full year of production from the Thunderbox gold operation near Leinster, but also pegged the miner as a mid-tier producer, having achieved a 300,000oz/year run-rate.

Saracen increased production by 45 per cent in FY17 to 272,807oz, making it the seventh largest gold producer in WA.

“It has been a milestone year for us; we hit our long-standing corporate milestone of a 300,000ozpa run-rate, which has sort of graduated us from a junior gold producer in to the mid-tier space,” Saracen managing director Raleigh Finlayson told Business News.

“At the same time as that, we’ve put a lot of money into the development of Thunderbox and also the ramp-up of Carosue Dam, so moving forward our cash-consuming assets are starting to become cash-producing assets, which is very pleasing.

“I think we’ve hit this at a great point in time from a macro point of view, what with a lot of uncertainty and geopolitical risk that’s happening at the moment.”

Mr Finlayson, who has served as the company’s managing director since April 2013, said most of the $31 million spent by Saracen on its operations in FY17 went into brownfields exploration to follow the extensions of its known deposits, which he said would help achieve production targets over a longer period of time.

He said a further $30 million would be spent in the coming year on Saracen’s operations as it worked towards its FY18 aspiration of 300,000oz in annual production.

Of that, Thunderbox is expected to account for 130,000ozpa in both FY18 and FY19.

“It is just about understanding the cycle, and we continue to maintain the aggression on exploration spend,” Mr Finlayson said.

“We think that something in the order of $30 million on exploration spending will be justified and shareholders will be rewarded for that.

“We’re at seven years of reserve life at the moment, and our ultimate goal is to get to 3 million ounces in reserves, which would be 10 years across our portfolio, and then that itself would become a significant investment milestone.

“Once we hit that milestone we’ll probably look at paring back exploration spending, and we’ll get serious about dividends.”

Mr Finlayson said the next opportunity was for Saracen to grow beyond its current production forecasts, with the company to update its five-year plan by the end of the coming quarter.

“Without promising anything, that may include a slight uptick in production if we feel it is sustainable; we don’t want to over-promise and under-deliver,” he said.

“We’ve got good visibility on our assets.”

Beyond Saracen’s five-year plan is the possibility of an underground mine at Thunderbox, which was foreshadowed in early August.

The company’s pre-feasibility study on the underground operation is based on a maiden ore reserve of 518,000oz, with a final decision on the likely $71 million investment to be made in FY20.

Another major investor in the local gold sector is Northern Star Resources, which plans to spend $100 million on its operations in FY18 on top of a $130 million spend last financial year.

Bill Beament says the ideal mine size, that’s globally relevant, is a 300,000ozpa operation.

Northern Star produced 514,735oz of gold in the 12 months to June, lower than its FY16 result of 558,143oz. This was largely the result of its sale of the Plutonic mine north-east of Meekatharra to private company Billabong Gold for $66 million in October. The figure nevertheless remained at the top end of its guidance range for the period.

It has maintained its ambition of reaching an annual output of 600,000oz by the end of FY18.

“We spent a lot on expansionary capital to grow our production profile and head towards 600,000oz for FY18,” executive chairman Bill Beament told Business News.

“A lot of risk goes with that spending. We delivered ahead of schedule and under budget, so we ticked some boxes there.

“We also spent a lot of money on drilling and exploration, so it was a very busy year when you look at the activity that was happening on our sites while still pouring a gold bar and delivering a greater profit.

“Of the $100 million we’ll spend this year, about $65 million will go towards expansionary work and $35 million will be put towards exploration.

“We spent about $180 million over the previous three years on drilling and exploration so we don’t need to spend that much anymore; we recently delivered a huge resource and reserve update, and we’ll continue to build on that, but we don’t need to keep supercharging that spend.”

Mr Beament said the bulk of the expansionary needs were focused on completing upgrades to the processing plant at Northern Star’s Jundee mine, while also bringing its new Kalgoorlie deposit online in the coming months.

He also foreshadowed a further 150,000oz in annual production could be added through a revitalisation strategy at its Paulsens mine, and a redevelopment program at its Central Tanami project, by around FY21.

“We’ve been doing a lot of work in the Tanami region; we’re the second-largest tenement holder in the Northern Territory,” Mr Beament said.

“We love the geology there; it has a very good geological setting that’s like walking into the eastern Goldfields in the 1980s. That’s why it is the number one exploration address for Newmont Mining at the moment.

“There’s a great opportunity there and we won’t rush it, but it’s a good project and it took us over four years to get our foot in the door there. It’s a good district.”

He said the company was also concentrating on bringing its Jundee and Kalgoorlie mines to the point where they both became 300,000ozpa operations by next year.

“You want scale and size; it delivers a lot of benefits if it takes the same amount of management time on a small mine as it does on a large mine,” Mr Beament said.

“We think the ideal mine size – that is really globally relevant – is your 300,000ozpa mine.”

Melbourne-headquartered St Barbara produced just over 265,000oz of gold from its primary Australian operation, the Gwalia mine near Leonora, in FY17, and aims to produce a similar amount in the year ahead.

The miner has planned a $100 million extension project at Gwalia, of which up to $55 million has been allocated for FY18.

“The project will extend mining at Gwalia to at least 2,000 metres below surface, as well as provide the opportunity for potential increases in production and a foundation for a further mine life extension,” a St Barbara spokesperson told Business News.

“The two main components of the extension project are a ventilation upgrade and paste aggregate fill, which involves mixing paste from the surface with waste crushed underground to fill stope cavities.”

The extension program started in March and has a three-year completion target.

Newcrest Mining, meanwhile, is hoping to more than make up for a shortfall in gold production at its Telfer gold mine in the eastern Pilbara region, having set an ambitious target of between 440,000oz and 500,000oz for FY18.

That’s despite the company falling short of the lower end of its production target for FY17 with 386,000oz produced, with unusually high rainfall during January and February and lower feed grades bearing the blame.

While light on details of its planned investments next year, Newcrest expects to spend up to $135 million on its only producing operation in WA this year to reach that production target.

Sydney-based Evolution Mining had planned to spend $60 million to sustain production at its Mungari and Edna May gold mines in WA this year, but instead (last week) announced the sale of the latter operation to Ramelius Resources for up to $90 million.

That deal has lowered Evolution’s output guidance from 230,000oz to 130,000oz for FY18, while Ramelius expects the Edna May mine to boost its annual output to about 205,000oz.

Evolution was planning up to a $15 million spend at Edna May. It is not yet known if Ramelius will carry out those works.

The ownership structure at Kalgoorlie’s Super Pit remains unchanged, with Newmont Mining and Barrick Gold each controlling 50 per cent of the operation, after plans by Barrick to sell its interest to Chinese company Shandong Tyan Home Co for $US1.3 billion fell through in April.

Barrick’s stake is still on the market, while the mine life of the open pit is drawing closer to its 2019 expiration date.

The combined operation, which includes the Mount Charlotte underground mine, has a further 10-year life.

The joint venture is also exploring at the pit’s edges and southern end, which have the potential to extend the mine’s life.

The Super Pit this year produced its 20 millionth ounce of gold since production began in 1989.

Newmont, meanwhile, has committed up to $US230 million ($286 million) on its operations for the 2017 calendar year, with about half of that going towards its Tanami mine in the NT, while the rest will be distributed among the Super Pit and its Boddington operation, which last year surpassed the Super Pit as the state’s largest gold mine.

Gold royalty woes

While the prospect of substantial investments in the local gold sector appear promising, plans announced in the recent state budget to increase the gold royalty has disappointed the sector and even cast doubt on the viability of those growth plans.

Gold miners have rallied under the banners of the Chamber of Minerals of Energy of Western Australia and the Association of Minerals & Exploration Companies to jointly oppose the royalty hike, which would increase from 2.5 per cent to 3.75 per cent by January, at a floor gold price of $1,200 an ounce.

Mr Finlayson represented Saracen at a recent gathering of gold mining executives in WA, led by CME and also attended by AMEC representatives, to explore ways to combat the royalty rise.

He said the higher costs of operations caused by the government’s proposal could dent Saracen’s profit margins by as much as 25 per cent.

“It has to come out of our bottom line, ultimately, which would otherwise be used for development and exploration of our two operations,” Mr Finlayson said.

“And that will also have a snowball effect to future royalty streams for the state government.”

He said it didn’t make sense for the government to increase the gold royalty, especially given that much of the monies raised would be redistributed through the GST system, of which WA will receive just 34 cents on the dollar in FY18.

“The increase in the royalty rate would be a short-term windfall while having a long-term negative impact on the sector,” Mr Finlayson said.

Mr Beament also attended the meeting of gold mining executives, and was one of the first to publicly voice his opposition to the royalty hike.

“WA is not just competing with other states to attract investment in gold exploration and development; it is competing with the rest of the world,” he said.

Mr Beament, who previously told Business News he would have been surprised if the gold royalty was to have been increased, said Premier Mark McGowan had shown that, while the government had changed, nothing else had.

“Western Australians have been thrown from the frying pan into the fire. The premier has broken his covenant with the WA business community and with Western Australians generally,” he said.

“It is now virtually impossible to believe anything he says.”

Newcrest chief executive Sandeep Biswas, who has foreshadowed over a 90 per cent hit to its profits at the company’s Telfer operations due to the royalty hike, said the government’s move reflected a lack of understanding of the dynamics of the Australian gold industry.

“At the end of the day it’s going to cost jobs and investment dollars into WA,” he said.