Bullion price rise shows no sign of stopping

BILL BEAMENT allowed himself a small glass of champagne in Kalgoorlie's Palace Hotel last week when the news came through that the gold price had broken through $1500 an ounce.

By InvestSMART · 10 Aug 2011

By InvestSMART ·
10 Aug 2011

Comments

BILL BEAMENT allowed himself a small glass of champagne in Kalgoorlie's Palace Hotel last week when the news came through that the gold price had broken through $1500 an ounce.

Since then the local price has surged to more than $1750 an ounce, thanks to the surge in US dollar prices to all-time highs and the retreat in the local unit to near parity with the greenback.

Mr Beament, the managing director of Western Australian gold producer Northern Star, would now consider buying a crate of bubbly, if he were not so busy.

Northern Star produces 75,000 ounces of gold annually from its already highly profitable Paulsens mine. For budget planning purposes, Mr Beament has been using $1400 an ounce gold. Should the local gold price hold at these record levels, Northern Star would pull in $26 million annually in cash surplus to budget expectations, all for the same amount of work.

"That's gobsmacking," Mr Beament said yesterday, given it was based on a one-week rise in the gold price alone. "We've got a window of opportunity now with the money and confidence to push to an annual production rate of 100,000 ounces."

It is a story being repeated across the industry. Based on industry production of about 9 million ounces annually, the $250-an-ounce price increase in the past week would represent an annual revenue boost of $2.25 billion.

Gold's climb on its haven status is also giving Matthew Gill, managing director of Castlemaine Goldfields (CGT), reason to smile.

CGT is in the early stages of reviving the Ballarat gold project in Victoria, picked up for a song last year after Lihir Gold (now part of Newcrest) failed to reach its big-time ambitions there despite spending $750 million.

Mr Gill has more modest ambitions for Ballarat as a 50,000 ounce-a-year producer, with feasibility study work based on $1100 an ounce gold and operating costs of $710 to $750 an ounce. Now that gold is $1750, there is potentially an additional $32 million in annual free operating cash flow to come the group's way over and above what it had planned.

It also means jobs at the mine are more secure.

Since acquiring the mothballed mine in May last year, CGT has been rebuilding the workforce. By the end of this year, 190 jobs will be created.

Mr Gill said that in all honesty, he had no idea where the gold price was headed. But others were prepared to take a stab yesterday, notably JPMorgan which lifted its $US1800-an-ounce year-end target to $US2500 an ounce or higher.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

Why has the local (AUD) gold price surged to more than $1,750 an ounce?

The article says the local gold price rose above $1,750 an ounce because US dollar gold prices climbed to all‑time highs while the Australian dollar retreated to near parity with the US dollar, amplifying the local (AUD) gold price.

How does a rising gold price impact producers like Northern Star?

According to Northern Star’s managing director Bill Beament, higher gold prices significantly boost cash flow. Northern Star produces 75,000 ounces a year from its Paulsens mine, had been budgeting at $1,400/oz, and said if local prices hold at current record levels the company would add about $26 million a year in cash surplus to budget expectations and could consider pushing annual production toward 100,000 ounces.

What does a $250/ounce rise in the gold price mean for the overall mining industry?

The article notes industry production is about 9 million ounces annually, so a $250/oz increase over the past week would represent roughly a $2.25 billion annual revenue boost across the industry.

How are junior developers like Castlemaine Goldfields (CGT) affected by the gold price jump?

Castlemaine Goldfields, reviving the Ballarat project, stands to benefit materially. Its feasibility work was based on $1,100/oz and operating costs of $710–$750/oz; with gold at $1,750/oz, CGT could see around an additional $32 million in annual free operating cash flow and greater job security for the workforce it is rebuilding.

What assumptions did CGT use in its Ballarat feasibility study?

The article states CGT’s feasibility work for Ballarat used a gold price assumption of $1,100 an ounce and operating costs in the range of $710 to $750 an ounce.

Does the article mention any analyst forecasts for future gold prices?

Yes. The article quotes JPMorgan raising its US dollar year‑end target from US$1,800 an ounce to US$2,500 an ounce or higher.

What operational or employment effects are being reported as a result of higher gold prices?

Higher gold prices are improving project economics and job security. For example, CGT has been rebuilding the Ballarat workforce and expects about 190 jobs by the end of the year; the stronger gold price makes those jobs and project plans more secure according to the article.

Should investors expect gold companies to expand production because of the recent price rise?

The article indicates some producers see a window of opportunity: Northern Star’s MD said the cash and confidence from higher prices could support pushing production toward 100,000 ounces a year. However, the article also records uncertainty about future prices — Castlemaine’s MD admitted he didn’t know where the gold price was headed — so expansion decisions will depend on how long higher prices persist.