MARKETS SPECTATOR: Gold mine carnage

The chief of Mungana Goldmines says 20 per cent of Australian gold production could be shut down as prices fall.

It was once said that an ounce of gold could get you a Savile Row suit. At 1118 AEST gold was $US1,190.11 an ounce. Now an ounce of gold, whose price is down about a third in 12 months, may not even get you some Savile Row underpants. The price of a bespoke suit from the famous London tailors is at least $5,900.

Pat Scott, managing director of Mungana Goldmines, says gold’s current price will result in a 20 per cent fall in Australian gold production. Mines will be closed because their costs are too high for companies to make a profit, Scott says.

Australia’s Bureau of Resources and Energy Economics expects 252 tons of gold to be produced this year from the country’s mines. If Scott’s prediction is accurate, Australia will produce about 200 tons of gold next year if gold continues to hover around $US1,200 an ounce.

“There will be mine shut downs and a lot less money will be spent on gold production,” Scott told Markets Spectator. “High cost producers will fall away quite rapidly, quicker than people think.”

Newcrest Mining, Australia’s biggest gold miner, has closed its Brisbane office and fired staff. Barrick Gold is cutting 100 office jobs, 30 per cent of its corporate office workers worldwide. Gold Fields chief executive Nick Holland told Bloomberg News the price of bullion has to rise to $US1,500 for the gold mining industry to be sustainable.

Mungana has two gold deposits in South Australia with an estimated resource size of 80,000 ounces. Scott said the company is analysing the commercial viability of the mines where the price of extracting an ounce of gold is less than $US1,000 an ounce.

As befits someone who has worked in gold mining for more than three decades, Scott says “I wouldn’t write off gold”. He says physical demand for gold from Chinese and Indian citizens is increasing as they seek to buy gold, which they believe it is a better store of value than the yuan or rupee.

Mungana’s shares at 1118 AEST rose half a cent, or 8.8 per cent, to 6.2 cents after the company said it will sell its minerals rights in the Chillagoe assets in north Queensland to Lucky Metals for $50 million in cash. Scott’s company will get 75 per cent of the $50 million. Kagara, a mining company in administration that has a 61 per cent stake in Mungana, will get the remaining 25 per cent of the money from the Chillagoe sale.

Scott says Mungana will use the proceeds from the Chillagoe sale to pay back stamp duty obligations and buy back shares to reduce Kagara’s share holding his company to less than 30 per cent. An extraordinary general meeting to finalise such a buyback will be held in the next two months, he says.