Miners Flailing As 10-year Gold Rush Grinds To A Halt (Aug 2013)

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Source: The Australian – Miners flailing as 10-year gold rush grinds to a halt

Notable excerpts:

IT has been a quarter from hell for Australia’s gold industry, and the wallets of the nation’s goldmining executives are lighter as a result.

The sector has been reeling in recent weeks, with a wave of redundancies, salary cuts and writedowns illustrating how painful life became as the 10-year bull run in gold prices ground to a swift halt.

Small to mid-tier goldminers Silver Lake Resources, Alacer Gold, Evolution Mining, Kingsgate Consolidated, Ramelius Resources, Resolute Mining and OceanaGold have announced between them more than $2.3 billion in writedowns in recent weeks. The bulk of that comes from Alacer, which across two separate impairments has written down the value of its Australian operations by more than $1bn.

The nation’s goldminers have taken an axe to costs — including chief executive pay packets — throughout their businesses as they battle to remain profitable.

Troy Resources managing director Paul Benson was among the first to move, slashing his own pay cheque by one-quarter. Plenty of others have followed suit.

There’s much more to the director pay cuts than self-flagellation. Leading from the front has set the example of austerity that workforces are expected to follow.

(There’s also the prospect that some executives were looking to pre-empt shareholder votes on remuneration during the upcoming annual general meeting season — better to act early and show initiative rather than get embarrassed by shareholders in a few months.)

Redundancies have been widespread; West Africa-focused gold explorer Gryphon Minerals, for instance, has laid off 75 per cent of its employees and contractors as it looks to ride out the market.

Exploration programs and project developments have been axed throughout the industry, while regional administrative offices have been shuttered.

The trigger for all the pain has been gold’s decline from its peak in October last year.

From a high of $US1796 an ounce, the gold price has dropped by more than 26 per cent to about $1320 an ounce.

That said, the recent pullback in the Australian dollar has provided a buffer for our miners.

In Australian dollar terms, the decline has been a more modest 15 per cent — from a peak of $1748 last October to about $1470 at present.

Not that the Aussie dollar insulation has been enough to shake the pessimism in the gold sector.

Gavin Thomas, the managing director of Kingsgate, fears that the slide in gold prices could hurt the goldmining industry here and overseas.

The industry just is not sustainable at these gold prices. If we have two years of a $US1250 gold price, that does structural damage to many, many mines, particularly underground mines. And that’s structural damage we won’t be able to recovered from,” he told The Weekend Australian.

South Africa’s deep underground mines, for so long a major source of global gold output, need a price of about $US1500 an ounce to remain in business. But the supply and demand dynamics of the industry are being overwhelmed, Mr Thomas says, by the “derivatives boys” controlling the market.

Trading — or what many in the industry call manipulation — by those derivatives agents is overwhelming what is strong and growing gold demand out of Asia, and China and India in particular.

It’s a negative prognosis shared by Alacer chief executive David Quinlivan. Alacer is dismantling its plans for a global mining business, with the group looking to sell its high-cost West Australian mines to focus on its more profitable assets in Turkey.

“It’ll be fairly bleak” in the Australian gold industry if current prices persist, Mr Quinlivan said, with numerous operations to be put into mothballs if conditions didn’t improve.

“They’ll sit there either until there’s a fundamental change in the Australian cost base — which I don’t see — or the gold price comes up and the exchange rate needs to fall dramatically,” he said.

Mr Quinlivan noted that many of the benefits from the recent pullback in the Australian dollar had been countered by the impact of the weakening currency on fuel costs, which accounted for about one-quarter of operating costs at Alacer’s Higginsville mine.

The cost of crude out of Singapore has jumped 28 per cent in Australian dollar terms since April, compared with a 10 per cent rise in the US dollar price.

Not all in the sector are as pessimistic. Evolution executive chairman Jake Klein is adamant that the Australian gold industry will benefit in the long term from the purge that’s under way.

The gold price trajectory, at least in $A terms, is going the right way again, he says, while the years of cost inflation that has long been a source of angst to the sector has finally peaked. In addition, the likely exit in coming months of international players that have not been fully committed to a future in Australia could prove “cathartic”, putting the mines into the hands of companies better able to manage and invest in them.

But, Mr Klein warned, it could take a while for labour costs, which represent 40-45 per cent of Evolution’s operating costs, to pull back to more realistic levels.

“It is easier said than done. They go up a lot faster than they come down and you have to work a lot harder to bring them down.”

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