Golden turmoil

SPOT gold prices were down about 17% from $US1600 an ounce at the start of April, the month that the global gold tumble began.
Golden turmoil Golden turmoil Golden turmoil Golden turmoil Golden turmoil

Driven largely by a distorted amount of selling on gold paper markets, perhaps the second surprise was that the price declines were sustained and even worsened each week - before hitting slightly below $1200/oz during the trading lows of July.

In terms of unscheduled impacts to PNG's gold scene so far, the mysterious, state-owned Tolukuma mine appears to have ceased operation. Meanwhile, the Lihir open cut mine has cut about 150 staff and reduced total output by switching the focus to low-cost ounces and drawing on its stockpile of reasonable-grade ore.

With gold becoming one of the more unpredictable commodities of the year, sought insights on the price-linked risks to mines and projects from Golder Associates's mining division national manager client development Ian Lipton.

What are the easiest cutbacks (jobs/contracts/services/operations/exploration spend) that PNG gold mining ops can make under a tough gold price climate?

There are rarely any easy cutbacks. Typically, exploration expenditure is the first to be cut because it has no immediate impact on revenue. However, mining companies know that reduced exploration quickly bites into the long-term sustainability of a mine.

It takes time, a good understanding of geology and a bit of luck to find new ore zones, then more time to advance them to the point of production. Lack of exploration can easily lead to premature mine closure.

Beyond that, cuts will focus on any ‘fat' that has accumulated within the organisation, inefficient work practices, and deferral of work that, in the short term, is non-essential.

There have been high and low operating cost gold operations in PNG over the years. What are the common links for the higher-cost mines - what aspect of mining/processing do some mines in PNG typically struggle with?

Nature has placed most gold deposits in PNG in remote mountainous regions with limited access to infrastructure. On top of this, high rainfall and seismic activity create challenges for the construction and maintenance of stable sites for mine infrastructure, such as plant sites and tailings storage facilities.

As a consequence, the capital cost of mine construction and the ongoing operating costs associated with servicing the mines are typically very high.

Under these circumstances, to have a low-cost gold mine requires not only careful mine management, but also exceptional grades. Of course, having a deposit with low waste-to-ore ratio and favourable metallurgical characteristics also helps.

What are some of the traps when gold mining operations revisit schedules and other aspects of mine planning under a low gold price environment?

When there's a sustained decrease in the gold price, a mine has to revisit the assumptions behind cut-off grades and mine plans. ‘Ore' blocks that no longer contribute positively to cash flow have to be identified, and the mine schedule adjusted to replace them with higher-grade mill feed.

This is not necessarily an easy thing to do. As the cut-off grade is lowered, waste-to-ore ratios increase and mine production rates have to increase in order to maintain adequate feed to the mill. The mine may not have the additional mining fleet capacity to achieve this. So there's an ongoing tension between the benefits of higher-grade mill feed and the ability of the mine to move enough material and the additional costs of mining the extra waste.

Depending on the geometry of the deposits and the ground conditions, ‘ore' blocks that are left in the ground may become inaccessible for mining and permanently lost from the inventory, even if the gold price recovers.

Another issue is that as cut-off grades are increased, ore continuity typically decreases. In some orebodies, this may have a significant impact on dilution; the increase in cut-off grade may fail to deliver the anticipated increase in run-of-mine grade.

Costly mistakes can easily be made, so it's important to assess the impact of cut-off grade changes before making any rash decisions. There are powerful, well-established simulation and optimisation techniques that can be used to examine options, demonstrate what's achievable under various scenarios and provide an informed basis for decision-making.

What are some of the newer cost-effective strategies that are emerging in gold operations around the world and which of these are applicable to PNG gold mines?

Every orebody and mine is different and each one may benefit from a different technological development. There are incremental improvements in automation in large open pit and underground mines, increasing expertise in bulk underground mining, such as block caving, blasting technology, ore processing, crushing and grinding and haulage, etc.

Some of these are capital intensive and when the gold price is weak, access to capital may be very difficult. So big ticket items are rarely available as a quick remedy.

Fortunately, there are often very basic improvements that can be made to operating practices that require little capital investment, yet can deliver significant returns. Grade control is one such area.

A review of grade control practices by Golder Associates at Ramelius Resources' Mount Magnet gold operation identified the potential to increase mill grade by modifying grade control and blasting practices. Implementation of this plan during the 2013 first quarter contributed to a 15- 20% increase in overall head grade.

Laser scanning and 3-D photogrammetry are also improving the accuracy of mining, slope stability assessment and monitoring, and are a relatively small investment.

Various projects are focusing on tailings dams in PNG versus riverine or deepsea tailings placement methods. Is there a risk that tailings dam-related costs are being underestimated and that development plans for them are at the risk of making damaging technical oversights?

Mine waste storage and disposal is a very environmentally and socially important issue in PNG. Mining companies are very conscious of their responsibility to find solutions that meet the needs and expectations of a variety of stakeholders, are technically feasible and economically viable.

This is not easy in mountainous, seismically active regions. Mining companies take their responsibilities very seriously and invest a lot of time and money in investigating and designing tailings storage options.

The high cost of tailings dam construction and the challenge of long-term sustainable closure of these facilities are clearly recognised and are some of the reasons why new projects struggle to get off the drawing board.

In the wake of increasing market volatility for commodities since the GFC emerged, is it likely that new projects will increasingly incorporate their operating models for a wider scope of prices than what is typically considered?

Mining feasibility studies already incorporate sensitivity analyses to help mine owners and their financial backers understand the impact of fluctuations in metal prices, energy costs, exchange rates, etc.

Nevertheless, a mine cannot be designed to accommodate the full range of volatility of factors such as the gold price and exchange rates without building in an unsustainable amount of redundant systems and capacity. Inevitably, final investment decisions are made on the basis of an assessment of the most likely scenario, not the worst case. This allows an optimised project to be designed and constructed.

After that, it's up to the mine management team to capitalise on favourable market conditions and minimise the impact of downturns.

Short-term pain is an unavoidable fact of life for most mines, but a good mine management team will take a holistic view of operations and be continually assessing ways to increase productivity and squeeze costs down.

Consulting companies such as Golder Associates can play a valuable role by providing an external perspective and linking in to global best practice.

Published in the August 2013 PNG Report magazine


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