Inconsistent costs in gold sector
THE world’s gold sector has been called to account for fostering potentially misleading and inconsistent reporting of its actual cost structure – with suggestions actual costs may be higher than those being publicly declared.
The concern has been voiced by one of gold’s most respected international players, Gold Fields Ltd chief executive Nick Holland.
The company is a global gold major with four mines in WA, as well as numerous gold mines and development projects in Peru, Chile, Ghana and South Africa.
Mr Holland told delegates at the Paydirt conference that potential underreporting was occurring in the context of a gold industry that generally was undercapitalised.
“We face a situation where gold miners have not been spending enough capital to sustain production, let alone grow production,” Mr Holland said.
“Any growth capital people speak about is in fact largely sustaining capital
“On the face of it, cost performance of the gold industry has been good – but this has been at the expense of sustainability of production.
“The cost to sustain production is increasing. The industry is mining more tonnes at lower grade to maintain ounces. Therefore, replacement is becoming more expensive as miners are having to go deeper to extract lower grade gold ore from more complex geological structures.
“More complex geology simply means higher processing costs, lower recoveries and harder rock.”
Mr Holland also questioned the merit of consolidation – with “big bang mergers” simply resulting in assets being recycled and rebadged.
“Consolidation does not address the undercapitalisation of the world’s gold industry,” Mr Holland said.
“In 2013, the World Gold Council (WGC) defined the true cost metrics under the All In Sustaining Cost (AISC) protocols and also defined non-sustaining costs.
“Between 2012-2016, AISC cost trends per US$/oz decreased at a rate of just under 7pc per year, but increased from 2017 onwards within an environment where there was a notable decrease in sustaining capital from US$313/ oz in 2012, to US$166 in 2016 – a level maintained since.
“Gold exploration budgets were also slashed with the bulk of such exploration over the past five years being brownfields projects and near-mine development.
“At the same time, growth in global mine supply slowed significantly, increasing only 1.8pc in 2018 compared to 6.2pc in 2013.”
Mr Holland said about 30pc of global gold reserves are currently associated with assets where a construction decision is yet to be made.
“It questions whether the gold industry is telling its full cost story,” Mr Holland said.
“Last year, some AISC reports by the industry excluded some capital and exploration costs that should have been included as per the 2013 World Gold Council guidelines.
“The amount of capital and exploration excluded in the reported AISC has been increasing over the past five years at a level equivalent to around US$30/oz.
“Despite the obvious slowdown in production, expenditure classified by the industry as ‘ growth’ or ‘ non-sustaining’, has increased significantly.
“Growth capital is therefore not really growth as the industry is not significantly increasing production, especially not the majors.”