Survival of the shiniest: will gold prevail?

Resources Corner

Australia’s gold output dropped by 5 per cent to 63.5 tonnes in the March quarter, largely due to weather-related disruption, according to the latest Gold Quarterly Review by Surbiton Associates. Western Australia experienced one of its most drenched first quarters in decades which didn’t help the figures given the west is responsible for approximately 80 per cent of the nations gold mining efforts. Other significant weather disruptions in the wild west include Cyclone Bianca, which stagnated operations in January, only to be followed by Cyclone Carlos in February. Meanwhile across the mainland, Queensland also experienced consecutive months of cyclonic battering. January saw the wrath of Cyclone Anthony while February was Cyclone Yasi’s turn. The resultant weather chaos saw mass flooding in Queensland and a thorough soaking of most of central Australia. 
 
Weather reports aside, the quarterly decline equates to approximately $170 million worth of gold based on current bullion pricing. In the early part of April, the precious metal took a tumble to hit $US1,380 an ounce (from $US1,575), and last week hit a fortnightly low as US stimulus concerns permeated global markets. Out of all of this however, the weakened Australian dollar exchange rate meant the falls have been smaller in terms of the local currency. Given the majority of Australian gold producers incur costs in Australian dollars, falls in the gold price have been partially offset by its progressive devaluation. 
 
Since the price plunge of early April, gold has fallen about 4 per cent In Australian dollar terms. In overall terms, gold has dropped 18 per cent - $US302 per ounce – since the start of this year. Convert this to Australian dollar syntax and the fall equates $162 an ounce, or 10 per cent. The figures do little to appease investor concerns though. A drop is, of course, a drop. Multiple drops form a puddle, and it is in a puddle of gloom that the local gold industry finds itself in on the back of multiple drops this year. Equity values have been kneecapped, the S&P/ASX gold index is down just under 50 per cent since the start of the year, as investors focus in on fears the Australian gold industry will fail to handle the price drops given their own mountainous costs. Surbiton Associates noted in its report that despite the quarter-on-quarter production decline, first quarter production numbers are in fact marginally up on the previous corresponding period. The firm’s director, Sandra Close, routinely dismissed notions that production costs in Australia was hurtling upwards at a pace that would see many operations become unviable. See below for more of Ms Close’s thoughts on the subject.
 
Economic news
 
The Reserve Bank of Australia has indicated it is prepared to cut the cash rate further even though the Australian dollar is falling. In its June board meeting minutes, the central bank says the high Australian dollar has been a drag on much of the non-mining sectors of the Australian economy. According to the RBA: 
 
‘‘The exchange rate remained at a high level considering the decline in export prices over the past year and a half. It was possible that the exchange rate would depreciate further over time, as the terms of trade declined, which would help foster a rebalancing of growth in the economy.’’
 
Commentary
 
Surbiton director Sandra Close this week warned against writing off the higher-cost gold operations just yet.

"The cash cost of producing an ounce of gold is a notoriously bad guide to production costs and can be quite misleading. It takes no account of changes in gold head grades, which can have a huge influence on the cash cost of gold produced. For about a decade gold head grades have been declining as the gold price has risen and made it economic to treat lower-grade ore. Given the lower prices now, we may well see this trend reversed as producers respond to changing circumstances. Since the recent downturn I have been asked several times if the Australian goldmining industry would survive. Given that the Australian goldmining industry has been around for more than 160 years and has faced far greater challenges than what is so far a relatively small decline in price, of course the industry will survive."
 
Rio wants to cha cha in Guinea
 
Rio Tinto Limited (ASX:RIO) is meeting the government of Guinea this week to discuss the stalled Simandou iron ore project, with the Guinean government reportedly willing to allow a third party to build the railway for the project at a potential cost of over $20 billion. Guinea’s government says it’s open to a partner financing 51 per cent or all of the railway project.
 
Also this week, Rio Tinto Limited (ASX:RIO) announced it will sell its Eagle project to multinational minerals company Lundin Mining Corporation, subject to regulatory approval. Rio Tinto says the deal is expected to close in the third quarter of this year and will net an estimated $US325 million. The Eagle project is a high-grade underground nickel-copper mine and mill in the Upper Peninsula of Michigan in the US. Construction began on the project in June 2010 and is about 55 per cent complete.  
 
Gold chief has become rusty: Shareholders assoc. 
 
Newcrest Mining Limited (ASX:NCM) Chairman Don Mercer has been urged to resign by the Australian Shareholders Association. The ASA is preparing to call for Mr Mercer to stand down before Newcrest's October annual meeting, according to media reports. Shareholders have been disappointed by the miner's performance since the $10 billion Lihir Gold takeover and more recently, the handling of the gold miner’s market update.
 
Newcrest Mining Limited (ASX:NCM) may face further scrutiny from ASIC over allegations it tipped analysts to a writedown weeks before an official announcement. The miner's shares fell sharply ahead of the announcement in question, with many analysts downgrading Newcrest before the news became public. Initial investigations have focused on the miner's activities immediately before the disclosure. But media reports say the latest revelations may lead ASIC to broaden its inquiry.
 
Target practise
 
BC Iron Limited (ASX:BCI) is on track to hit its 2014 full production target, with the price of iron ore about $US110 per tonne. The Pilbara iron ore miner says its joint venture production target remains at six million tonnes per annum. Joint venture production guidance for fiscal 2013 is on track to be five million tonnes, with BC Iron's equity share to be 3.2 million tonnes.
 
Clough Limited (ASX:CLO) has upgraded its full-year earnings forecast after a strong quarterly performance and cost-saving measures. The engineering and project services company says it’s expecting fiscal 2013 earnings before interest and tax to come in at $90 million on revenue of $1.5 billion.
 
Alacer Gold Corporation CDI (ASX:AQG) has revealed it is pursuing the sale of its Australian assets after receiving expressions of interest from several parties. The Colorado based gold producing company says divesting its local holdings would enable it to focus on its operations in Turkey.
 
Lynas Corporation Limited (ASX:LYC) will set a new minimum price schedule for its products from the 1st of July. Lynas says it wants sustainable prices for producers and customers so the rare earths market can grow to its full potential over the long term. 

by Joel Spreadborough

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