High price to avert pain: gold chief

GOLD prices will need to soar to record levels in coming years if the gold sector is to avoid the wave of rationalisation hurting other parts of the resource industry, according to one of the world's top five gold executives.

By InvestSMART · 1 Aug 2012

By InvestSMART ·
1 Aug 2012

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Gold Fields boss Nick Holland told the Melbourne Mining Club that rising costs would strangle the global gold sector in coming years and many projects would be abandoned if the price stayed at current levels through to 2015.

Spot gold finished yesterday's Australian session at $US1622.18 an ounce.

Mr Holland was even more pessimistic about the industry's prospects if analysts' predictions of a slide in the gold price to $US1200 an ounce turned out to be right. At that price, there would be no gold industry, he said.

The comments come despite many goldminers boasting profit margins close to $1000 an ounce in the present environment where gold is fetching not far below its record high of $US1900 an ounce.

But Mr Holland said claims of $1000 margins were typically bogus, as they did not include corporate and capital costs. Miners spruiking such margins were not fooling investors, and risked drawing the attention of tax-hungry governments.

The industry was likely to see costs double in coming years, as skilled labour shortages and energy prices continued to rise, Mr Holland said.

A gold price around $US2000 an ounce would be needed to ensure current profitability was maintained, he said. "You have to run harder to stand still . . . It may be that we are going to have to see the sector rationalise before people believe us."

Investors wanting exposure to gold have flocked to exchange-traded funds rather than gold stocks and Mr Holland said companies would need to rank shareholder returns ahead of developing marginal new projects if that trend was to be reversed.

That, too, was likely to result in fewer projects being developed, as companies focused on fewer, more profitable projects, to maximise cash flow.

Based in South Africa, Gold Fields operates the St Ives mine in Western Australia, and Mr Holland said his company was keen to acquire another mine in Australia.

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Frequently Asked Questions about this Article…

What did Gold Fields chief Nick Holland say about future gold prices and the health of the gold sector?

Nick Holland warned that gold prices would need to surge to record levels to prevent a wave of industry rationalisation. He said rising costs could force many projects to be abandoned if the price stayed at then-current levels through to 2015, and that a fall to about US$1,200 an ounce would effectively eliminate the gold industry.

Why does Holland believe many gold projects could be abandoned?

Holland pointed to rising costs—including skilled labour shortages and higher energy prices—that he expects could double industry costs. He argued that at current or lower gold prices marginal projects would become uneconomic and likely be dropped.

How did spot gold prices mentioned in the article compare to the record high and some analysts' predictions?

The article noted spot gold at about US$1,622.18 an ounce, below the near-record high of roughly US$1,900 an ounce. Some analysts had predicted a slide to about US$1,200 an ounce, a level Holland said would be devastating for the industry.

Are gold miners really enjoying US$1,000-per-ounce profit margins as sometimes claimed?

Holland cautioned that claims of US$1,000-per-ounce margins are typically misleading because they often exclude corporate overhead and capital costs. He warned such headline margins can fool investors and attract scrutiny from tax-hungry governments.

How have investors been getting exposure to gold instead of buying gold stocks?

According to the article, many investors have preferred exchange-traded funds (ETFs) for gold exposure rather than buying gold mining stocks, which has pressured companies to rethink shareholder returns and project development.

What did Holland suggest gold companies should prioritise to win back investors from ETFs?

Holland said companies should rank shareholder returns ahead of developing marginal new projects. Focusing on fewer, more profitable projects to maximise cash flow would help make gold stocks more attractive to investors.

How might industry rationalisation change the number and type of gold projects developed?

If companies prioritise cash flow and shareholder returns, the industry is likely to develop fewer projects overall, concentrating on the most profitable operations and abandoning marginal developments.

What is Gold Fields' presence in Australia and are they looking to expand there?

Gold Fields, based in South Africa, operates the St Ives mine in Western Australia. The article says Holland indicated the company was keen to acquire another mine in Australia.