Gold mine production costs break through $600/ounce level once more as output jumps higher -GFMS

Increases in production stemmed both from new mining ventures and increases at existing operations with Africa the only region to record declining output

Author: Rhona O'Connell
Posted: Monday , 14 Sep 2009

LONDON -

An increase of 7% in world gold mine production the first half of 2009 was accompanied by a 7% increase in production costs between the first and second quarters of the year to take costs at primary gold mines to more than $600/ounce, according to the recently-released update to GFMS' authoritative Gold Survey 2009. Total cash costs for the half-year overall remained contained at $457/ounce, with a fall in the first quarter and renewed increases in the second. Even so, the costs in the second quarter of the year were not as high as those in the third quarter of 2008, when total production costs reached $623/ounce.

On a year-on-year basis, global production costs registered a relatively small increase of almost 5%, although the situation was, as always, affected by exchange rates. In South Africa, for example, local costs increased year-on-year by 15% in the first quarter although margins widened by 48%, while in the second quarter South African margins only increased by 1%. Elsewhere the depreciation of the Australian dollar meant that local currency costs increased by 27% year on year, while in dollar terms they came down.

The study points out that, of course, currencies are not the only important parameter and that the start-up of new operations played a role in lowering averages overall. Equally, new operations were not the only driving force behind their increase in production, as mine sequencing activities at Grasberg in Indonesia, for example, contributed to a 30-tonne increase in Indonesian output.

Production increased by 79 tonnes overall between the first half of 2008 and the first half of 2009. Apart from the substantial increase in Indonesia, China retained its slot as the world's largest producer with a 13% increase in production to 152 tonnes for the half year, while the start up of Kinross's Kupol mine in Russia was a substantial contributor to double-digit growth in Russia also.

Africa was the only region to record a fall in production, with another fall in South Africa, which sustained a 110-tonne or 10% contraction in output. This result was "materially" weaker than the markets had been looking for, given that the industry did not suffer the same power disruptions in the first half of the year that it had had to endure in the first half of 2008. Some of the mines in the AngloGold Ashanti stable were among the operations suffering the largest falls in output, although equally the company's Vaal River surface operations posted the largest individual improvement in the country during the period.

Elsewhere, increases in production stemmed both from new mining ventures and increases at existing operations, but project financing remains relatively limited. In the first quarter there was just one tonne of net dehedging, and at the end of the second quarter the book stood at 458 tonnes. GFMS estimates that global dehedging in the first half of the year amounted to just 31 tonnes. However, the announcement from Barrick in early September means that Barrick on its own reduced its fixed-price contact position by 75 tonnes between the start of July and the 7th September - This is in contrast to the results shown in one table in the study, reporting that in the six months to end-June the heaviest net hedging activity came from AngloGold Ashanti, which reduced its delta-adjusted position by 25 tonnes.

GFMS expects a handful of project-finance related hedging programmes to be implemented in the second half year, while the Barrick activity will obviously give a substantial boost to the level of net dehedging during the period.

The group calculates that at the end of June 67% of the global hedge book comprised forward sales contracts and gold loans, with options making up the remainder. Comparison with the end of 2008 means that the delta-adjusted options exposure actually increased, although only very slightly, over the period. This was as a result of the effect of price changes on the delta on existing options contracts, with sold call positions moving deeper into the money while bought puts moved further out of the money. On a nominal basis both the forwards and options position contracted by a similar amount. Detailed analysis of the structure of the options book suggests that the options portion of the book is currently serving as more of a price cap than as a method of revenue protection.

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