An overview of the current state of the gold sector and the opportunities and challenges it faces in Australia and New Zealand
Gold is hot. Reported all-in sustaining costs (AISC) indicate that strong margins prevail for the vast majority of Australian and New Zealand gold producers in 2016. The outlook for miners will continue to be positive if gold prices and exchange rates remain around present levels into 2017. However, in the longer term, significant challenges to the sustainability and longevity of the local gold industry exist, including the identification of new quality resources to facilitate timely ore reserve replacement.
Current state of the gold sector
Presently, the local gold mining sector is enjoying near-perfect market conditions, with high gold prices in Australian dollars, low fuel prices and few shortages in skilled labour. That is, while locally denominated gold prices in 2016 are of the same order as those that prevailed in 2011-12, many of the cost-side pressures that squeezed operator margins at that time have since dissipated.
As at 30 June 2016, the Australian and New Zealand gold industry comprised approximately 60 mining operations primarily producing gold and a further nine sites where gold is produced as a by-product. These operations produced in excess of 2.35 Moz of gold in the June 2016 quarter, with the ten largest gold producers contributing over 50 per cent of this production with 1.21 Moz of gold. Breaking this production down by mine type for the quarter saw 52 per cent of the mines (1.12 Moz) source their ore from underground operations, 30 per cent from open pit (0.62 Moz) and 18 per cent from combined open pit and underground sources (0.65 Moz). The five largest producing gold operations in order were Kalgoorlie, Boddington, Cadia Valley, Tanami and Telfer. Western Australia leads production, with 66.2 per cent of Australia/New Zealand production coming from the state. New Zealand contributes 2.5 per cent of the total gold produced. The other states in order of production levels are New South Wales, Northern Territory, Queensland, Victoria, South Australia and Tasmania.
Most mining companies have adopted the World Gold Council (2013) guidelines for reporting AISC since its introduction, now accounting for slightly over 75 per cent of the primary gold mines, which in turn comprise over 95 per cent of the primary gold production. The five lowest-cost AISC mines in order for the June quarter were Cadia Valley, Kanowna Belle, Tanami, Gwalia and Duketon North. The weighted average AISC (weighted by gold ounces produced) for the June quarter was A$1068/oz, with a quarterly spot gold price of A$1670/oz. Thus, healthy margins are being made throughout the sector on a per ounce basis. With the higher gold price, the partial hedging of future gold sales is again being used as a risk management mechanism to provide greater certainty to future revenue.
To be in the lowest cost quartile by production for the June quarter (for those gold mines that report an AISC), a mine needed an AISC of A$915/oz or less. The median AISC for that quarter was A$1070/oz, and an AISC of A$1257/oz or higher placed a mine in the highest cost quartile (Ulrich and Trench, 2016). The AISC cost curve for the June 2016 quarter is presented in Figure 1.
The average gold grade processed by all the primary gold mines ranged from 0.79 g/t to 24.90 g/t, while it ranged from 0.79 g/t to 9.57 g/t for the mines that reported AISC.
As an industry, the gold grades processed at each mine are not indicative of whether the AISC for a given mine will be high or low. That is, higher gold grades do not correlate with lower AISC, and vice versa, across the portfolio of Australian and New Zealand mines (Figure 2). However, at the single mine scale, the gold grade that is processed from quarter to quarter is indeed reflected in the AISC over time, with higher grades leading to a lowering of AISC.
The mining sector mantra that ‘grade is king’ is therefore mine-specific in the case of gold as grade is a very poor predictor of cost performance when viewed across the industry as a whole. Other geological characteristics (including structure, geometry and mineralisation style) and engineering attributes (mining method and production scale) influence AISC in addition to ore grade.
Higher gold prices provide market opportunity and may facilitate production from smaller mines and lower-quality gold deposits, in some cases via toll treatment where there is existing mill capacity. Typically, such operations will reside in the higher cost quartiles of the AISC aggregate supply curve.
The shift to AISC reporting
AISC reporting has superseded cash cost reporting and is now the dominant cost reporting structure used by companies with gold operations. While it provides greater transparency towards the real cost of mining, it still isn’t perfect and has some grey areas.
AISC can either be reported on a by-product or co-product basis:
- by-product AISC – revenues received from the sale of by-products are deducted from operating expenses prior to calculating the cash costs for the
- co-product AISC – the cost attributed to the production of each metal is relative to its contribution to revenue.
This isn’t an issue for the majority of ‘vanilla’ gold mines, but it is a significant factor in the cost reporting for multi-commodity operations. For example, Cadia Valley (Au-Cu) is reported on a by-product basis and Boddington (Au-Cu) on a co-product basis. The publicly reported AISC for these two operations are therefore not directly comparable. Ideally, both methods should be made clear – so in this example Cadia Valley should also be reported on a co-product basis. It should be noted that Cadia Valley on a co-product basis would still be the lowest- or one of the lowest-cost producers, but would not then appear so far ahead of the other low-cost mines.
There is no strict definition as to when an operation should be reported on a co-product or by-product basis. One rule of thumb is that when the revenue from a secondary commodity exceeds ten per cent of total mine revenue, co-product costing should apply. However, the ten per cent figure is arbitrary and higher figures of 20 or even 30 per cent could also become the de facto standard in future. Perhaps a better definition would be for co-product costing to be the principal reporting mechanism in cases where the additional commodity is considered sufficiently valuable as to impact on mine planning decisions over and above the sole production of gold.
The cost of in-mine and near-mine exploration is another grey area. That is, some drilling in the immediate mine environment will be classified as part of sustaining exploration capital, whereas other drilling may be deemed to be non-sustaining exploration capital rather than a mine cost. The mine-by-mine definition can affect the reported AISC, with some mines classifying a higher proportion of drilling as sustaining exploration capital than others. We understand that drilling into areas classified as Inferred Mineral Resources is one grey area where practice differs between operations.
Furthermore, minor variations can also exist between those companies reporting AISC using the total number of gold ounces produced in a period versus gold ounces sold in that period.
Learning from past mistakes
The larger local gold miners look to be learning from past industry challenges. For example, significant debt obligations have prompted portfolio adjustments amongst the global gold majors since 2011-12. Northern Star Resources and Evolution Mining have both combined acquisitions with organic growth through in-mine exploration programs. These companies and others have led an industry-wide focus on quality ounces over quantity in 2015-16.
For example, Evolution Mining’s acquisition of Cowal and subsequent near-mine exploration programs have delivered substantial additional ore reserves. While making acquisitions (including a gold production stream from the Ernest Henry copper-gold mine operated by Glencore), Evolution Mining has also adjusted its portfolio via the divestment of the Pajingo mine.
Northern Star Resources’ acquisitions of Jundee, Kundana and Kanowna Belle, combined with aggressive exploration, have delivered increased Mineral Resources and Ore Reserves that have extended the mine lives of these operations. At the same time, Northern Star has divested the higher-cost
Both mid-tier and global gold miners are taking the view that managing fewer, larger-producing mines avoids management expertise being spread too thinly across smaller assets within the portfolio and are targeting gains in production and improved costs.
Sustainability of the Australian and New Zealand gold industry
The long-term future and sustainability of the gold industry in a country is measured by its Economic Demonstrated Resources (EDR), which is an indicator of a country’s gold endowment. EDR in Australia is defined as the total gold in Proven and Probable Ore Reserves and most of Measured and Indicated Mineral Resources (Geoscience Australia, 2015). At the end of 2014, Australia had an accessible EDR of 9082 t (292 Moz) of gold, of which only 39 per cent (3550 t or 114 Moz) was classified as Ore Reserves (Geoscience Australia, 2015). Approximately 50 per cent of the gold in Ore Reserves is attributable to four deposits: Cadia Valley, Olympic Dam, Boddington and Kalgoorlie.
Australia has had a good track record in terms of EDR growth (Phillips, 2013; Phillips and Vearncombe, 2013), though this is less evident if exploration success is only measured by substantial greenfield discoveries (more than 1 Moz) over the same period. The number of discoveries is also affected by incremental Ore Reserve replacement, where an initial deposit discovery of 0.4 Moz over a number of years becomes a more than 1 Moz deposit.
Are we overstating the longevity of the local gold sector? If one takes the current Ore Reserves and divides it by the current production rates of Australia and New Zealand’s gold operations, without any Ore Reserve replacement, approximately 15 operations are at risk of closure within two years and 30 could close in five years. The seriousness of this cannot be understated when looking at the time it takes for a new discovery to become a mine, which is typically in excess of five years. The gold sector therefore faces a challenge that is common to other mineral commodities in Australia to identify the ‘mines of tomorrow’ (Guj and Schodde, 2013).
Ore Reserve replacement is shaping as the biggest stay-in-business threat and longer-term sustainability challenge to the gold industry. With over half of the current operations sourcing ore from underground mines, this presents additional technical challenges. As the current gold operations go deeper, more open pit operations are transitioning to underground mining and many mines have current Ore Reserves representing only two to three years of future production. The cost of deep drilling from the surface soon becomes prohibitive, as does underground development for drill cuddies. Therefore, one sees only the regular incremental replacement of Ore Reserves being mined, with mines maintaining their two- to three-year mine life. It is rare to observe substantial increases in Ore Reserves that provide long-term certainty and sustainability for the sector, and hence mine life, without new discoveries.
With 50 per cent of Australia’s gold Ore Reserves held by four companies (BHP Billiton, Newcrest, Newmont and Barrick) in just four deposits, the sustainability and longevity of a few mines are very secure. However, much work remains to be done to both extend existing Ore Reserves and discover entirely new ore sources elsewhere.
Despite the Australian and New Zealand gold industry having endured for over 150 years, our understanding of the critical factors that link geological characteristics to gold mine economics and cost competitiveness remains only basic. A stronger understanding in future of the ‘geo-economics’ of our gold mines will help prioritise exploration and development towards the higher-quality, as yet undiscovered resources and reserves that will underpin the industry’s next 150 years.
Geoscience Australia, 2015. Australia’s Identified Mineral Resources 2015 [online]. Available from: d28rz98at9flks.cloudfront.net/87839/87839_Identified_Minerals.pdf
Guj P and Schodde R, 2013. Where are Australia’s mines of tomorrow?, The AusIMM Bulletin, June 2013:76-82.
Phillips G N, 2013. Australian gold exploration – a quick audit (or how do we measure success?), The AusIMM Bulletin, August 2013:22-25.
Phillips G N and Vearncombe J, 2013. Australian gold exploration – following up the recent audit, The AusIMM Bulletin, October 2013:76.
Ulrich S and Trench A, 2016. June quarter 2016 Australia & NZ gold operations [online]. Available from: www.cet.edu.au/news-and-media/news/news-details/2016/09/02/ravensgate-cet-gold-operations-bulletin
World Gold Council, 2013. Publication of the World Gold Council’s Guidance Note on non-GAAP metrics – all-in sustaining costs and all-in costs [online]. Available from: www.gold.org/download/file/3180/guidance_on_all_in_costs_pr.pdf
Feature image by Loïc Lagarde. Used under CC BY 2.0.