Is Australia really viable as a long-term Au producer?

[jman2007]

This'll be sure to get the punters thinking....

In light of the rapidly rising costs mining companies are facing in Australia, particularly in the gold sector, in rampant diesel costs, steel costs and labour....is the future of this historic sector in jeopardy? Many economic feasibilty studies from as recently as 2006 are proving to be obsolete and out-of-date, and the increasingly tight credit market is forcing creditors and banks to implement tighter credit terms and conditions.

Costs per ounce are on the rise, we have seen a recent high-profile case where high operating costs and falling grades at Bronzewing have forced View Resources into voluntary administration. Other companies are also under considerable pressure, such as Monarch Gold whose current costs at Davyhurst are almost $1000/oz, and Barrick Gold whose Granny Smith's Mill was running close to $700/oz in the last quater of 2007. With so many companies operating under very tight and sensitive financial models, a sharp fall in the gold price could prove very costly.

Does the future for Australian gold companies lie in Africa? With the emergence of Ghana and Tanzania as potential premier gold producing countries in their own right, and the allure of an unending stream of cheap labour, which companies will be drawn to this exciting, but potentially volatile part of the world? With costs averaging around $350/oz in Tanzania, could you blame them?

jman

 

[cuttlefish]

VRE grades were below 2 g/t. Monarch davyhurst grades well below expectations and sub 2g/t as well. Companies should do their homework before commencing a mine is probably the better lesson.

These days it seems that Australian immigration laws do allow for importation of competitive labour if not available locally, however the landscape in this regard has probably changed with a switch from right to left govt.

In the case of Barrick - I reckon its grandstanding for some political goal - possible related to the paragraph preceding. In a rising gold price environment with Africa experiencing production problems why would they shut down a profitable operation.

With luck commodity price inflation will outpace wage inflation and so we can still all live the good live in Aus.

Some of the things you mention will impact more than just mining - e.g. tight credit will affect funding for all ventures so low risk will be the order of the day across the board. This may be a good thing and stop companies from wasting everybodies time and money drilling up or commissioning low grade crud. (or producing thneeds which nobody needs, or building housing estates beyond the back of beyond, etc.)

 

[jman2007]

Some good points there Cuttlefish,

Yes I agree, the credit crunch may end up having some positive benefits for investors in the long-term, in that many of these so-called "pretender" comapnies may silently vanish overnight. I think a cull in the industry may be on the cards at some point.

I think the Barrick case is a very interesting one, with having 10's of millions of ounces in resources worldwide, why would they want to persist with a high-cost operation in a high cost environment? Remember that the Granny's mill is a 4mtpa job (in good condition too), but that means a heck of a lot of feedstock is required from Wallaby underground (requiring substansial haulage by road) to keep this operation viable at the costs I mentioned above. So in this case, a big mill can also act as a liability. My own companies diesel bill for last month was $400,000... I know, it is staggering.

I don't suppose many people have heard of the Riko dik discovery in Pakistan, in Baluchistan Province. It is a giant project in Chaghai, containing 12.3 million tons of copper and 20.9 million ounces (yes, that's right) of gold. In inferred and indicated resources it is believed to be even bigger than Sarcheshmeh in Iran and Escondido in Chile. Its projected revenue will be nearly $ 200 million in royalty and taxes alone for the Baluchistan Govt over its 23 year mine life. And yes, you guessed it... Barrick are right in there as a major player.

Which raises another question, will the big established miners gradually offload their higher cost operations for lower cost, but higher risk ventures? A work colleague of mine, himself a consultant Geologist of high regard in the industry, says he could find many of his clients high-grade (>7g/t) deposits of substansial size in Africa, although there is a catch, many of these sites do not contain a mill and lack infrastructure...so there is capex, but labour is low cost! So you see, it is a bit of a double-edged sword in many ways.

jman

 

[So_Cynical]

Most of the offshore producers have lower costs per Oz...thats 1 of the reasons i like em...Aussie mine workers
get payed big money and that impacts on the costs and the labor shortage impacts on development.

One of the reasons i didn't buy into VRE or any of the other WA/NT speckies is labor and costs.

 

[jman2007]

Most of the offshore producers have lower costs per Oz...thats 1 of the reasons i like em...Aussie mine workers
get payed big money and that impacts on the costs and the labor shortage impacts on development.

One of the reasons i didn't buy into VRE or any of the other WA/NT speckies is labor and costs.

Yes,

The availabilty of tech staff, or lack of, is a major talking point atm. What we're seeing now are large numbers of professionals boat-hopping after 6 months or so in one position, and basically just chasing the big dollars from company to company. Not that I see anything essentially wrong with this approach, it's just the lifestyle that these poeple choose to lead. It does have a big impact on companies whose knowledge base can be very thin, and the real expertise is concentrated amongst just a few key personnel.

FIFO is very very costly for comapnies too, to give a hypothetical example, to fly 100 people in and out of the NE goldfields may cost around $60,000 if they're doing a 2-week swing.

jman

 

[Sean K]

I think we're in a cycle phase when only high grade, cheap potential opex explorers/developers will succeed, but the pendulum will swing back. Right now, high grade, near surface projects are king, and for real potential, 2m oz au + is required. Inflationary pressures are really smashing the juniors now I think. eg, $100K + to drive a truck? Rediculous.

 

[Whiskers]

Inflationary pressures are really smashing the juniors now I think. eg, $100K + to drive a truck? Rediculous.

We had better beef up our tech sector to adapt the technology from those automatic vacume cleaners and lawn mowers to the mining industry.

 

[jman2007]

I think we're in a cycle phase when only high grade, cheap potential opex explorers/developers will succeed, but the pendulum will swing back. Right now, high grade, near surface projects are king, and for real potential, 2m oz au + is required. Inflationary pressures are really smashing the juniors now I think. eg, $100K + to drive a truck? Rediculous.

Yes capex outlay will be very difficult for many of the juniors to come by this year. Even aspiring mid-tier producers like MON are finding cost pressures and cap-rasing in the current climate increasingly difficult, as Michael Kiernan discovered late last week. I think the trend may be towards a more JV style of operation, with junrs additionally tightening up on exploration expenditure as they try to ride the storm out, and basically just trying to cover the minimum costs of expenditure on their tenements.

I'd be keen to hear your expanded thoughts on why you think the pendulum may swing back the other way Kennas?

Cheers
jman

 

[jman2007]

Even aspiring mid-tier producers like MON are finding cost pressures and cap-rasing in the current climate increasingly difficult, as Michael Kiernan discovered late last week. I think the trend may be towards a more JV style of operation, with junrs additionally tightening up on exploration expenditure as they try to ride the storm out, and basically just trying to cover the minimum costs of expenditure on their tenements.

hmmm...

I guess we've just seen a perfect example of what can happen if the groundwork and some serious thought isn't put into a project, which imo is what finally brought down Davyhurst. A careful 2-year exploration programme should have been implemented from day one, before any kind of decision to advance to production was made.

Unfortunately it probably wont be the last time we see a company try to to "rejuvenate" a "historically significant" mining center such as Davyhurst, whilst neglecting the impact that historical raping and pillaging of the old pits would have on their economics.

I'm also still pretty ambivalent regarding multiple satellite-style operations which require hauling the ore >40-50km to a central processing facility, when I think about the haulage costs I get very scared . Undoubtedly companies with >250k oz @ >1.8-2.0 g/t deposits in oxide would be the odds-on favourites atm. You want that work index to be as low as possible.

Personally I would be looking very, very hard at any company that is planning to go underground in Australia atm.

jman