Surge in price presents a golden opportunity
BILL Beament allowed himself a small glass of champagne in the front bar of Kalgoorlie's Palace Hotel last week when the late news came through that the local gold price had broken through the $1500 an ounce level.
BILL Beament allowed himself a small glass of champagne in the front bar of Kalgoorlie's Palace Hotel last week when the late news came through that the local gold price had broken through the $1500 an ounce level.Since then, the local price has surged to more than $1750 an ounce, thanks to the surge in US dollar prices and the retreat in the dollar to near-parity with the greenback.Mr Beament, the managing director of West Australian gold producer Northern Star, would consider buying a crate of bubbly if he weren't so busy.Northern Star produces 75,000 ounces (2100 kilograms) of gold annually from its highly profitable Paulsens mine.For budget planning purposes, Beament has been using $1400 an ounce for the price of gold. Should the local gold price hold at these levels, Northern Star would pull in an additional $26 million in annual surplus cash to budget expectations."That's gobsmacking," Mr Beament said yesterday, given that the figure is 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 last week would represent an annual revenue boost of $2.25 billion.But there is a disconnect between the bonanza gold price and gold equity values. Few of the gold producers have been beaten up as badly as the rest of the market. But they have not exactly taken off, either.Mr Beament said that the disconnect reflected the nervousness in the equities market in general."Everyone seems to think that the world around them is about to fall in a heap. But if the gold price settles out at anywhere near where it is now, the investment community will have to follow gold equities."Gold is the only game in town at the moment and it will have to be reflected in equity prices once the free-falling elsewhere stops."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.Gill has more modest ambitions for Ballarat as a 50,000 ounce-a-year producer, with feasibility study work based on $1100 per ounce of gold and operating costs of $710 to $750 an ounce.Now that gold is at $1750 an ounce, 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 than they would have been. Since acquiring the mothballed mine from Lihir in May last year, CGT has been rebuilding the workforce. By the end of this year, 190 jobs will have been created.Mr Gill said he had no idea where the gold price was headed. But others were prepared to take a stab yesterday, notably JPMorgan, which lifted its $US1800 ($A1739) an ounce year-end target to $US2500 an ounce or higher.It is against this backdrop that Cortona Resources plans to tap debt markets for up to $37 million to fund the development of its Dargues Reef goldmine at Majors Creek in New South Wales. Cortona went down that path before gold's most recent surge, pointing to expected free cash flows of $112 million from an initial mine life of six years at a gold price of $1550 an ounce. Should gold hold at these levels, it could add $60 million to the life-of-mine free cash-flow estimate.