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Gold miners gain strength from culling

Miningnews net

July 26,2017

THE 2017 financial year was a good one for Aussie gold producers, as might be expected given the industry enjoyed a record annual average gold price in local dollars of more than A$1650 an ounce. By Barry FitzGerald It means that when profit reporting season kicks off next month, there will be a conga line of producers reporting record profits on the back of what have become high margin operations, due to both the strong gold price, and sedate cost pressures. But none of that masks an unease in the sector that as always, the current fat margins could dissipate quickly should gold or the US exchange rate do something unkind, or if there is a break-out in costs, with energy the key concern from the potential for higher oil prices, or in the case of the Eastern states, the reality of higher grid power prices. And as it is, gold is now back at $1571 an ounce which alone accounts for an annual revenue hit compared with last year's average price of close to $700 million. Best then to prepare for a potential downside scenario. And the best protection of all is to be as low cost a producer as possible throughout the cycle. For multi-mine operators, it is portfolio upgrading through the disposal of lesser quality assets which delivers a long-term structural repositioning on the cost curve. Nothing new in that except to say that investors are on board nowadays with the "quality of the ounces not the quantity'' mantra which has displaced the ''maximise production'' mantra which ruled at most companies before the GFC. That means the multi-mine producers now feel free to take a haircut on their production volumes if the end result is an improvement in the quality of the ounces remaining in the portfolio in terms of margins, mine life and expansion potential. And that is what is happening. There were a couple examples last year and there are more in the works. Last year saw Northern Star push off its Plutonic gold mine in Western Australia in a cash and scrip deal priced at $66.2 million to Chris Bradbrook's Canadian-listed Superior Gold. Northern Star's Bill Beament said at the time the sale of the 80,000 ounce-a-year producer met a key goal of the company of managing its asset base in a manner which maximised financial returns, not headline production figures. Fair enough too given Plutonic's all-in sustaining costs of production in the 2016FY was a heady $1738 an ounce. Last year also saw Evolution flick its Pajingo gold mine in Queensland to China's Minjar in a $52 million cash and royalty deal. Evolution's Jake Klein said at the time that given the company's strong growth in the preceding 18 months, it made sense for the asset to be operated by an emerging gold producer that could provide the right level of focus on further extending the mine's operating life. "Evolution has consistently stated that a key object of its business strategy is to improve the quality of its asset portfolio over time." All-in costs of in the 2016FY of $1275 obviously made the sale of the 70,000 ounce-a-year producer an easy decision. Evolution's Edna May mine at Southern Cross in WA could be the next to go. Klein would not confirm last week speculation that Evolution had been approached for a sale, with the interest variously valued by the market on a net present value basis at $60-$100 million. "We are happy with the operation and speculation around whether it is for sale is not something I am going to specifically comment on,'' Klein said. Mind you, he said much the same ahead of the Pajingo sale last year. Edna May had a shocking March quarter when it ran out of mill feed. The 80,000 ounce-a-year operation bounced back in the June quarter but even so, its all-in cost of $1300 an ounce tells you it is clearly not in the same class as Evolution's other operations. Given Klein's comments last year around improving the quality of the asset base over time, Edna May's time in the Evolution stable looks to be up. Newcrest is another toying with more portfolio fine-tuning after last year's exit from the troubled Hidden Valley mine in PNG, when effectively paid its partner in the operation, South Africa's Harmony, $30 million to take its 50% share off its hands. Now it has its Bonikro mine in west Africa under the spotlight. A "strategic review'' of Bonikro is due to be finalised this quarter and essentially involves an assessment of whether it is worth investing in a further cutback, or selling out of the 130,000 ounce-a-year producer. It is a high cost producer for sure, with ASIC of US$1279 an ounce in the June quarter. But Newcrest has shown in the past a willingness to stick with its higher cost operations if it believes there is greater value holding on. It did that in 2005 when it pulled a sale of the big Telfer operation in WA, securing the future of the high-cost operation by hedging its gold sales. Hedge positions now cover 730,435 ounces or about two year's production at an average Australian gold price of A$1751 an ounce. Just as well too. Telfer's ASIC in the June quarter was an uncomfortable US$1352 an ounce (A$1703). If good visibility on the operation getting back to a sustainable cost of about $1000 an ounce does not emerge in the quarters ahead, it could well return to the chopping block. And there is nothing wrong with that. Apart from anything else, the flipping of non-core assets could well lead to the emergence of a fresh wave of entrepreneurial activity in the gold sector as buyers of the discarded assets seek to turn them in to silk purses. That was of course how Northern Star and Evolution got their start.