Margin pressure

IN the wake of a gold price collapse that started in April, PNG Report takes a look at operating costs for several mines in Papua New Guinea.
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Published in the June 2013 PNG Report magazine

Bullish sentiment for gold was still present in the first week of April with Thomson Reuters GFMS's annual gold survey predicting that an ounce of the precious metal would be in the mid-$US1800s this year. GFMS also estimated that all-in costs for gold producers rose by 12% to an average of $1211 an ounce last year.

The price is worth noting when considering the big sell-off in the gold paper market later in April which dragged gold prices uncomfortably close to operating expenses.

On May 23, near the editorial deadline for this edition, spot gold closed at $1391.10/oz. It was a 17.5% fall from January 2, the first trading day for most commodities in 2013.

In terms of PNG gold mines, the operating costs of the state-owned Tolukuma mine are not well known but it's not hard to see a link between the gold price tumble and recent industrial action which brought a halt to the operation.

St Barbara Corporation's efforts to trim back costs at the Simberi mine seem particularly well timed. Total operating costs at Simberi fell 14% from the previous quarter to $1080/oz in the March quarter - giving it breathing space from lower gold prices.

Barrick previously forecast total cash costs for its Porgera mine to be around $1000-1100/oz for 2013, indicating the operation has enough scope to still carve out profits even if there are some further gold price falls in coming months.

Newcrest Mining's Lihir gold mine remains a standout performer with operating costs at $A676/oz in the March quarter and it can still look forward to future improvements from its various plant upgrades.

But the Hidden Valley gold mine shared by Newcrest and Harmony may seem destined for a suspension if the 50:50 joint venture can't turn it around. The mine clocked up March quarter operating costs of $1790/oz - firmly putting it in loss-making territory.

While gold could rebound as a safe-haven investment during future events in these global debt-troubled times, Macquarie Private Wealth recently provided its take on why gold exchange-traded funds sold off so sharply.

"Obviously underlying appetite for gold as an investment has weakened on low inflation, the prospect of quantitative easing ending earlier than had been anticipated and lower tail-risks," MPW said.

"But another factor is presumably the make-up of the investor base. Gold attracted far more large-scale institutional investor money than the other precious metals and it is this which seems to have shifted out."

Update

Spot gold was about $1241 an ounce in early-afternoon trading (AEST), which was an improvement from the low of $1200.65 hit on Thursday night, a price level not seen since August 2010.

From the close on April 1 to last week's low, spot gold had fallen 25%. Job cuts have started up with reports suggesting 150 positions were recently axed at the Lihir mine, while various Australian gold operations are under similar or worse pressure.

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