Creamer Media’s Mining Weekly 30-Oct-2008
By: Martin Creamer
Gold production was “in crisis” and a gold price of $900-to-$1 000/oz was needed to arrest the downward trend, AngloGold Ashanti CEO Mark Cutifani said on Thursday.
Cutifani said that the world had seen a decline in the production of gold across the globe in the past seven years, and that the industry could experience another decline of production at up to 5% a year for the next five years.
“The gold industry from a production perspective is in crisis,” he said.
There had been a 20% to 30% production decline in South Africa in the last five years and grades are continuing to diminish in opencast mines around the world.
That lack of production, he said, would result in gold’s fundamentals improving.
Recovery of production was now being set back by the current global financial crisis, which would exacerbate the current problem.
“We need something in the order of $900/oz to $1 000/oz for there to be ongoing and sustainable investment in gold, to turn that trend around,” he added.
On a fundamentals basis, the industry was not investing enough in future production and, as a consequence, there were also increasing cost pressures on those operations that were going deeper and increasing strip ratios.
“On fundamentals, we believe that the gold price will be strong, and certainly we’ve been encouraged that gold has performed relatively well through the current crisis, particularly in the financial market with redemptions.
“Is it next month, is it the next three months, or is it the next six months that we will see the fundamentals fully assert themselves, and again move towards that $1 000/oz target that we see long-term sustainability?” he asked.
“If you look at the price of gold in the last month or two, it has done much better than all of the other commodities, because the fundamentals are still at play,” he said.
Cutifani said that there had been nowhere near the same level of expansionary investment in more gold production as there had been in other metals.
“Certainly, as the most competitive, total-cost operator in the major space in the gold industry, we are positioned to outperform any other major player in gold,” he added.
Cutifani said that the September quarter had been a tough one, with gold trading in a range from a high of $988/oz to a low of $736/oz, post quarter seeing a dramatic selloff across all markets and gold dipping below $700/oz and the rand weakening to R11 to the dollar.
AngloGold Ashanti was expecting a gold production of 1,25-million ounces and total cash costs of $460/oz, on exchange-rate assumptions of R8,40/$, A$/$0,80, Brazilian 1.9/$ and an Argentinean peso 3,11/$.
“As of the first quarter of next year, you will see our discount on stock price go from what would have been 18% before we started the accelerated hedge book reconstruction, to around 6% in the first quarter.
“What that actually means is around $250-million more revenue in a quarter as a consequence of taking that hedge book off, if the gold price is, say, $900/oz,” he said.
“That is significant when you consider that we have got the most competitive business on a total cost basis in the world of gold,” he said.
Credit Suisse Standard Securities research analyst Dr David Davis commented that AngloGold Ashanti’s cost structures were “competitive” and the uranium credits might assist the company. The capital cost structures of gold companies like Barrick and Newmont were higher than those of AngloGold Ashanti.
“Certainly, AngloGold Ashanti is well up there,” Davis said.
Afrifocus Securities mining analyst Mark Madeyski told Mining Weekly Online that he was impressed with the current AngloGold Ashanti, which had brought in “some very good management”.
“But their operations are getting deeper, and they seem overly optimistic on safety. You will never eliminate fatalities, not at these depths,” he said.
Also, travel time to the face was becoming excessive.
The Anglogold Ashanti performance for the third quarter 2008 included:
* Delivery for the third consecutive quarter on production and cost guidance, with continued reduction in the hedge book;
* Production at 1,265-million ounces, 1% higher than previous quarter, with Obuasi and Cerro Vanguardia posting substantial improvements;
* Total cash costs at $486/oz - better than guidance but higher than the previous quarter, owing to wage increases, power tariffs, inflation and inventory movements - while costs are expected to reduce to approximately $460/oz in the fourth quarter;
* Continuing safety focus, with lost time injury rate improving 10% and despite four fatalities during the quarter, the fatality rate reduced for the year by 60% against the same period in2007;
* Uranium production up 7% to 346 000 pounds, with enhanced exposure to the spot market expected in the fourth quarter;
* Hedge-book commitments reduced by 580,000oz during the quarter, with the company on track to reduce book to 6-million ounces by year-end;
* Adjusted headline loss of $119-million incurred, as a result of accelerated hedge reduction;
AngloGold Ashanti reported an increase in gold production on 1,265Moz, 1% higher than the previous quarter and in-line with guidance.
Cerro Vanguardia in Argentina and Obuasi in Ghana posted significant improvements against the previous quarter, with gold production increasing.
The South African operations continued to perform steadily, using 92,4% of power supply, while operating at 100% production capacity.
The total cash costs for the quarter at $486/oz, were higher than the prior quarter’s $434/oz due to input cost inflation, annual wage increases, higher power tariffs and inventory adjustments, but were within market guidance of $490/oz.
The company also reduced its hedge commitments by 580 000 oz during the quarter, with a total hedge reduction year-to-date of almost 5-million ounces. As a result of the continued accelerated hedge reduction, the company received a price of $644/oz and posted an adjusted headline loss of $119-million.
Net debt was reduced from $2,7-billion at the end of June 2008 to $1,23-billion at the end of September 2008.
