Australian gold output declines as producers cut grades

JOHANNESBURG (miningweekly.com) – Although Australian gold output declined slightly in the first three months of 2016, the country’s gold sector is benefiting from higher prices, Melbourne mining consultants Surbiton Associates said in its latest quarterly gold survey, published on Sunday.

Australian gold production totalled 71 t in the latest three-month period,  which is about 1.5 t, or 2%, lower than for the December quarter in 2015. However, compared with the first quarter of 2015, output increased by 3 t, or 4%.

“Gold production in the March quarter is often lower than the other three quarters of the year,” said Surbiton director Dr Sandra Close.

“Reasons for this include disruption due to wet weather in the cyclone season, the fewer number of days in the March quarter and the New Year holiday period.”

Close said that with the better-than-usual weather early this year and an extra day for leap year, Australian gold mines actually treated more ore in the March quarter than in the previous three months. However, she pointed out that despite the increase in tonnes treated, gold production fell slightly.

“A feature of this last quarter has been the decline in the grade of ore being treated,” Close said. “This is not unexpected, as the gold price in Australian dollar terms has increased, due to a recovery in the US dollar price of gold and a weakening of the Australian dollar. Many mine operators have the flexibility to trim their grades and still make a reasonable profit.”

“The Australian gold mining sector is very sensitive to the grade of ore being treated,” she added.  “If the overall grade is reduced by just a fraction of a gram per tonne, it will reduce the total gold output by several tonnes.”

Close said that treating lower grade ore resulted in lower gold output, while at the same time, since fewer gold ounces were being produced, the per-ounce cost of production increased. However, if the price was higher, margins were still maintained.

“This is just what we saw in the period between 2005 and 2012 when local gold prices were rising.

“Then the trend reversed when the price of gold fell in 2013 and 2014 but as prices have increased once again, we may now see another period of lower grades and lower output.”

Australian gold prices hit a high of A$1 750/oz in mid-February and have been mostly over A$1 700/oz since early May 2016. By comparison, the record Australian dollar gold price reached just over A$1 800/oz in August 2011.

Close said producers were also taking advantage of the improved Australian gold prices to lock in those higher prices for future sales, both by selling their production forward and through the use of options.

“In the past, some producers avoided ‘hedging’ – options and forward sales - like the plague,” Close said.

“At last, more and more now realise that selling part of their gold output forward or using options, are legitimate and rational means of risk management and of securing future revenues.”

Recently, large and small companies including Newcrest Mining, Evolution Mining, Alkane Resources and Blackham Resources have all announced that they have increased their “hedged” positions. Some of these contracts guarantee that the companies would receive prices as high as A$1 778/oz, as far out as mid-2019.

In the March quarter 2016, Newcrest’s Cadia East mine in New South Wales became Australia’s largest gold producer for the first time, exceeding the output from several of the large West Australian operations. Output from the Cadia East mine was expected to increase further. With Newcrest’s nearby Ridgeway mine now closed, the higher grade Cadia East ore would be treated both through the Cadia mill and the Ridgeway mill.

“On the whole much of the Australian gold sector is travelling pretty well at the moment and once again it is benefiting from the weaker Australian dollar,” Close said.

Australia is the second largest gold producing country in the world after China. Currently, Australian gold production is worth over A$15-billion a year.