The second interim update for GFMS Ltd.'s annual Gold Survey carries its usual comprehensive market assessment including an in-depth analysis of the mining sector. The analysis records a provisional fall in production for the year of 88 tonnes, with a large majority of the reduction taking place in the first half of the year. Producers' total cash costs rose by 22% year-on-year to an average of $472/ounce for the nine months of 2008, while total production costs were also up by 22% at $591/ounce. The figures for the third quarter of 2008 alone record an increase of 25% year-on-year in cash costs and a 24% in production costs. These figures, which are based on primary gold mine production and are in accord with the Gold Institute reporting standard, show a cash margin in the third quarter of the year of $365/ounce, up form a margin of $276 in the third quarter of the previous year - but almost equal to the margin enjoyed in the final quarter of 2007 as gold prices increased by almost $100 between the third and fourth quarters of that year. Australia sustained the highest costs in the third quarter after a massive year-on-year increase of 50%. This was partly due to extraneous factors with an explosion and loss of power at the Varanus Island gas plant, which forced a number of mines to take alternative, higher-cost, sources of power.South Africa lay in second place - both in outright dollar terms and in terms of the change in costs, although these were ameliorated by the fall in the South African rand, which declined against the dollar by 10% year on year on a quarterly average basis.Perhaps more worrying than the year-on-year increases, large though they are, is the quarter-on-quarter comparison. South Africa was in the front rank here this time, with cost increases of 17%, with Australia sustaining increases of 12% - while Canada went the other way with a fall of 7% against the second quarter. This is due in part to cost reductions at Campbell Red Lake complex, while a slippage of 3% quarter on quarter in the CDN:US$ rate also helped matters.Mine de-hedging reached a provisional full year level of 346 tonnes, compared with 447 tonnes in 2007 and an average of 282 tonnes per annum from 2000 and 2007 inclusive (net de-hedging started in 2000). The majority of the changes took place in the first half of the year and GFMS estimates that the global hedge book at end-2008 stood at below 500 tonnes, which represents a 20-year low - although there is still the scope for a substantial revision to this figure given that producers' fourth-quarter reports have yet to be published and there is always the possibly of unscheduled deliveries against a hedge programme. The majority of the activity in the first nine months of the year came from AngloGold Ashanti with a contraction of 143 tonnes; some 84 tonnes of this came in the first half of the year and at the end of September the amount on the AngloGold Ashanti book that was formally scheduled for delivery in the fourth quarter of the year was negligible. Barrick Gold has continued to convert from a fixed to a floating price structure, while Buenaventura and Newcrest completed their programmes in the first half of the year. The study notes a relatively low degree of fresh hedging; the result of the mine by mine analysis suggests that gross hedging in the first nine months of the year were equivalent to just over one-tenth of the level of gross de-hedging.The study of the completion of the delta-adjusted hedge book concludes that the spilt between forwards and options was similar at the end of the third quarter to that at the start of the year, with roughly 70% in forwards and 30% in options, compared with 68% and 32% respectively a t the start of the year.The study points out that while neither investors nor management may view hedging with much favour, the prevailing economic environment may render it necessary as counterparties protect themselves against risk. It notes also, though, that producers remain firmly bullish and that dehedging is expected to continue in the first half of 2009, even though the rate may not reach that of the first half of 2008.
Join the Discussion