Gold miners in 62% capex boost

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Roger Baxter, chief economist, Chamber of Mines

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Gold miners in 62% capex boost
Allan Seccombe
Posted: Wed, 07 Mar 2007

[miningmx.com] -- SOUTH AFRICAN gold output in 2006 fell to its lowest level in 84 years because of decline in grades mined, but there are strong signs that production will stabilise this year, Chamber of Mines chief economist Roger Baxter said on Wednesday.

Gold output of 275,119kg in 2006 was 7.5% lower than the previous year. The question is now open as to whether the other major gold producing countries like Australia, the United States and China might just have over taken the world�s leading gold supplier.

�This is the lowest level of gold production since the strike in 1922 reduced production to 218,031kg,� the Chamber said in a statement.

lowest production since 1922

A 44% increase in the rand gold price in 2006 has prompted gold companies operating in South Africa to pour cash into their mines through deepening projects, brownfield expansions, de-bottlenecking exercises and underground development programmes.

Gold Fields is deepening its Driefontein and Beatrix mines. AngloGold Ashanti has a similar exercise at its Mponeng mine. Harmony said at the release of its December quarter results it was focusing on underground development to increase grades by up to 15%.

Capital expenditure (capex) by Chamber members is up a chunky 62% to nearly R6bn, bearing in mind that a lower gold price of R90,500 in 2005 led to mining companies cutting back on capex.

�The big pick up in capex implies the industry is catching up on the capex it dropped in 2005, but it also reflects their optimism that they can get back into areas they should be mining,� Baxter said.

�It implies you should see the rate of decline in production slowing or even stabilising in 2007,� he said. �The short term prospects for the South African gold industry are the most encouraging they�ve been for some time.�

The last time South Africa recorded an increase in gold production was in 2002 when the rand gold price averaged R104,000/kg on the back of currency weakness. It rose 0.3%.

The rate of annual decline in South African gold output has slowed. In 2005, gold output fell 13% year on year to 296.3 tonnes. South African gold output peaked in 1970 at 1,000 tonnes, but has been falling steadily as mines grow older, deeper and more expensive to operate.

Australian gold output in 2005 was 263 tonnes and the US 262 tonnes. China produced 224 tonnes and Peru 208 tonnes.

�All the major producers have experienced declining gold production in the past five years,� Baxter said.

Australian gold output dropped 33 tonnes from 296 in 2000, while the US recorded output of 355 tonnes in that year, 93 tonnes more than last year�s production. China, however, added 52 tonnes over that period. South Africa gold production fell 98 tonnes.

�There is no guarantee that other producers would have overtaken South Africa. South Africa will still pretty much be top of the pile,� Baxter said.

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The higher prices have also encouraged gold miners to tackle lower grades in their South African deposits, Baxter said. Chamber members milled 1.5% more tonnes, but at a lower grade. The average grade fell 9.3%.

Steve Shepherd, a gold analyst with JP Morgan, said in a recent note the shift to mining lower grades in response to higher gold prices was a development that would destroy profit gearing in the gold shares.

Baxter argued that it was important for gold companies to tackle parts of their ore bodies sterilised by low prices.

�Higher rand gold prices mean companies can mine lower average grades to break even with costs. It�s a critically important issue,� Baxter said, adding it gives companies flexibility to mine lower grades, increasing the size of the economically recoverable ore body.

�It�s not indicative of a one-way slide. It means there�s more flexibility in the production numbers and for when times are a little worse in the future,� he said.

�The companies will try to mine as close to their pay limit as they can because there�s an encouragement from the tax side, but you also mine as much of the ore underground as possible,� he said.

Total production costs before capital expenditure were R99,725/kg (2005: R89,130), but when capital costs were factored in the production costs were nearly 21% higher at R125,030/kg (2005: R103,518).

�However, the year-on-year increase in cash production costs of 16.3% eroded some of the grade flexibility provided to the mines by higher prices,� he said.

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