Australia’s gold production up despite declining prices

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Image credit: Flickr user The Puzzler

Australia’s quarterly gold production continues to rise despite the turmoil in the industry caused by a $4.5 billion hit to annual revenues from the drastic drop in prices.

Image credit: Flickr user The Puzzler
Image credit: Flickr user The Puzzler

According to an article on The Australian, September-quarter gold production was 69.5 tonnes (2.23 million ounces), worth $3 billion at current spot prices and exchange rates, up 4% on 67 tonnes in the preceding June quarter, and up 12% on 62 tonnes produced in the previous corresponding period. Currently, gold is down 27% on its level a year ago.

Surbiton director Sandra Close said the increased output was due to the treatment of higher ore grades. According to her, this resulted in a substantial decline in cash costs of production.

“During the decade-long period of rising gold prices between 2001 and 2011, gold producers progressively reduced the grade of ore being treated. This resulted in lower gold production and higher cash costs. Now the reverse is happening, particularly since the fall in gold prices earlier this year.”

“Higher grades are being treated, gold production has increased, and cash costs have fallen. Mining higher-grade ore is a perfectly rational response when the price of gold declines, so that margins are maintained,” said Dr. Close.

Dr. Close further warns against the West Australian government lifting mining royalty rates, which accounts for about 70% of Australia’s newly mined gold production.

“If the royalty is too low, the state government and the community lose out, but if it is too high, some operations will close, unemployment will rise and investment in the gold industry will decline.”

“The latest numbers show the gold mining industry is working hard to remain competitive while in the minerals industry as a whole, unemployment has risen considerably. Now is not the time to put further cost pressure on the gold producers,” she said.

According to Citi’s metals and mining research desk, the recent weakness in the gold price means the struggle to generate cash will continue, and that companies with leveraged balance sheets are and will be under “significant pressure”.

“All-in sustaining cash costs for many ASX-listed producers remain well over $US1000 an ounce. With cost-cutting programs already undertaken, further margin pressure is likely to (result in) major revisions to scheduling (and hence mine life) and or/or eventual mine closures,” Citi said.