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Tough outlook for gold mining sector - BDlive

Monday, 22 August 2016

THE global gold industry is facing a "hiatus" in output because of the lack of exploration expenditure in recent years and companies mining high-grade portions of their deposits, leaving the lower-grade areas for the future, which means increased costs down the line, according to Gold Fields CEO Nick Holland.

In a broad-ranging overview of the gold sector and what it has done to curtail costs, restore profit and generate value for shareholders since the fall in the gold price in 2012, Holland said much had been done to restore companies to health but the recovery in the gold price in 2016 had come too soon.

Drawing on analysis Gold Fields had done of itself and 10 of its peers accounting for nearly a third of global gold production, Holland told delegates at the Melbourne Mining Club in Australia on Monday that the industry had benefited enormously from currencies in a range of gold-producing countries weakening against the dollar and a fall in the oil price, both of which combined with internal efforts to restore profit margins and cut debt.

"Exploration spend has been halved. Bear in mind from 1995 to 2012 it had already been coming down year after year. And then we just whacked it again. Now, this is your lifeblood for the future. It was already too low before we cut, and now we’ve cut again," Holland said, pointing out that expenditure on exploration fell to $36/oz in 2015 from $78/oz in 2012.

"We are not spending enough to sustain the industry into the future," he said, pointing out that the life of reserves — the unmined gold for which there were economically viable plans for extraction — had fallen to 17 years from 24 in the past four years.

Gold Fields was about to restart exploration expenditure, he said. It had already started work in Australia.

"One of the reasons that there has been such a competitive dogfight for acquisitions of late is that some of the major companies can see some gaps in their production profile. They are keen to fill these gaps because they are not getting it through brownfields or organic growth inside their companies, because of the cut in spending over the past few years," he said.

There had been $2.9bn worth of deals done so far in 2016 compared with $2.1bn for the whole of 2015, he said, adding that the higher gold price meant there could be yet more transactions before the end of the year.

Harmony Gold sees its output falling by about a fifth to about 800,000oz a year within five years and CEO Peter Steenkamp said last week that the company was expediting plans to grow production to 1.5-million ounces through merger and acquisition activity and a number of internal projects. But analysts cautioned that the growth strategy was coming at a time of intense competition for expensive gold assets.

Gold Fields estimated the 11 companies had up to 60% of their production in places like Australia, Canada and SA, where currencies fell 26%, 21% and 47%, respectively, between 2012 and the end of 2015. There was a risk of a spike in domestic inflation following these currency declines, which would put mining costs under pressure again, Holland said.

The 11 companies cut their all-in costs 36% in the past four years and all-in sustaining costs, which excluded project expenditure, came down by a fifth to adjust for lower gold prices, he said.

Stay-in-business spending, money spent to upgrade and to keep assets competitive, fell to 26% of operating expenditure from 46% in 2012. Holland said this deferral of expenditure was of concern.

It appeared the gold industry was targeting the high-grade areas of their deposits to cut debt and improve profit margins, he said, citing research done by a third party showing 52% of production in 2015 was mined at grades above the reserve grade, meaning mining was not being blended to incorporate lower-grade material to ensure the deposits were being optimally mined.

The practice — known as high-grading of an ore body — meant "some of the lower grade has been parked, and sooner or later the lower grade has to be mined and that will push up the costs; we saw that in the early 2000s", Holland said.

He was concerned the gold price had recovered too soon to above $1,300/oz when at the start of 2016 it was threatening to reach $1,000/oz. "Some people might say gold has recovered too early. The industry hasn’t finished its cleaning up. Maybe if the gold price had only gone up in a year’s time maybe the industry would have had more discipline," he said.

Up to 2012, mining companies were under pressure from investors and analysts to chase growth, resulting in some companies spending hundreds of millions of dollars on projects that had yet to come into production, he said.

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