WHILE bullish analysts are tipping the gold price to skyrocket up to US$5000 an ounce, others are warning that production costs will also face a rapid rise and make Australia a less appealing place for gold investment.
Australia’s gold sector met in Perth in mid-April for the 2012 Paydirt Australian Gold Conference to discuss issues facing the industry.
At the conference, Chamber of Minerals and Energy WA director Damian Callachor said the industry’s biggest challenge at the moment was the alarming rise in production costs, with some mines experiencing cash costs in the realm of US$1200 per ounce of gold.
“There are three contributing factors: labour, energy and grade impacts,” Mr Callachor said.
“If we do not start constraining our gold production costs, Australia’s gold costs will be comparable to that of the worst-performing country to date: South Africa.” “This is starting to emerge at a time something like 90 countries around the world can claim to be gold producers and are competing for investment dollars from overseas.”
Mr Callachor said high production costs and cheaper alternatives would makeAustralia a less inviting place to develop gold projects.
“[There is also] the ongoing threat that the Minerals Resource Rent Tax [MRRT] will be expanded to include gold in addition to July’s carbon tax imposts,” he said.
“For those lucky enough to be close to, or part of, a mainstream power grid, those grid costs also increasing alarmingly – and unlike other commodities, increases in gold production costs cannot be passed on to customers.”
Integra Mining managing director Chris Cairns said another issue the gold industry faced was a lack of government support. He said that with the gold sector exporting $18.9 billion worth of the precious metal per year it was Australia’s third-largest export earner and the Federal Government was doing little to support it.
“What we have is a Government which is encouraging industrial disputes, considering expanding the MRRT to other metals and ignores the fact that any idiot can fi nd a coal or iron ore deposit but gold is invariably in highly complex systems which are diffi cult to find,” Mr Cairns said. “On top of that, the Government is looking at cutting the diesel rebate for our mining trucks – which don’t leave the mine sites and don’t use the public roads for which the tax pays for – and is removing the exploration expenditures as carried forward tax losses.” Mr Cairns said that fewer projects would be developed due to rising costs. “What the equities market has to factor in is that of the top 10 gold producers in Australia, most of them are very mature mines and will be coming offline over the next few years.”
“The global all up cost of gold production is US$1100 an ounce, with forecasters predicting a hike by 2017 to around $1700 an ounce. “So the gold price has been rising but so too have costs, so marginal gold mining operations will continue to remain marginal mines,” Mr Cairns said. Westpac Institutional Bank senior economist Justin Smirk said fabrication demand for gold was declining, and this would cause the gold price to fall.
“If gold prices remain high but fabrication demand falls then gold loses a base for its value pricing, and this is why we don’t see gold breaching $2000 an ounce in any meaningful way,” he said.
Mr Smirk added that he believed the gold price would settle at about $1700/oz and drop to $1500 by 2014.
While Messrs Callachor, Cairns and Smirk highlighted some of the challenges facing Australia’s gold industry and had a more cautious outlook for the precious metal, Martin Place Securities managing director Barry Dawes was far more optimistic.
According to Mr Dawes, the Australian gold sector had a “wonderful three or four years ahead of it”.
“The demand for gold is rising because of the debasement of currency and concern about governments running defi cits,” he said.
“If countries go broke, like Greece did, you do not want to be holding their piece of paper. You want to hold gold.
“Central banks are buying and they used to be sellers. They’ve reduced the supply of gold and, because they are buying it, they have increased demand.”
As less people want to hold currency, gold jewellery, bullion and coin hoarding has risen. “We’ve got over 4000 tonnes of gold [global] demand at the moment, but we’ve only got 2800 tonnes of mine production,” Mr Dawes added.
He said the gap meant inventories were being run down and added that he believed the gold price would continue to grow by 20 per cent per annum, if not more, given that demand exceeded supply, currencies had been debased and listed gold companies were undervalued.
“That means we’ll get our US$2000[/oz] this year and $5000[/oz] by 2016,” he said. Mr Dawes addressed the precious metal’s historic trend in explaining his reasoning behind the US$5000/oz figure “After the gold price was freed against the US dollar in mid-1972, it surged from US$35/oz: peaking at $887.50 on January 21, 1980,” he said.
“For the next 20 years, the gold price came lower. It got down to US$250[/oz].” Mr Dawes said that after bottoming out, the price began to strengthen. “Since 2001, it has been increasing by
a rate of just under 20 per cent per annum, which is pretty robust.” Unlike other analysts, Mr Dawes said a return to stable financial markets would not
result in a drop in demand, but a rise. “I think it will increase for two reasons: one, most of the new demand is from China, so that will continue to grow as wealth rises; [and] two, if things start to improve, as a I believe they will, the prices of bonds must fall, which means those safe haven assets of bonds and the US dollar will be less important. Funds will come out of the bond market and
the US dollar, and go into gold and equities and commodities.”
Mr Dawes added that he anticipated Australia’s gold output would jump from its current 280 tonnes per annum to 400tpa. To support his hypothesis, Mr Dawes said there had been many recent exploration successes in WA where underground drilling was revealing sound gold grades. “Gold’s standing in Australia will always be a question of price but we forecast a surprising growth in earnings and dividends in gold equities that will change things quite positively for these stocks.”
Additionally, Mr Dawes said operating costs were being bumped up by the development of lower-grade gold deposits. Record gold prices were encouraging previously uneconomic deposits to be
developed, which had resulted in driving up the average cost of operation.
According to Paydirt conference convener Bill Repard, the price of gold was hovering at about US$1650/oz at the beginning of April. “It is down on the highs of in excess of $1900 an ounce in September last year, and is some $500 or so an ounce short of some analysts’ predictions of a 2012 price potential exceeding $2200 an ounce,” Mr Repard said. “It is apparent that the Australian gold industry remains uncertain on how 2012 is likely to evolve.”
By Lorna Seatter