Volatile gold prices push down on Aussie production

High gold prices dampened Australian production slightly in the third quarter as some miners apparently turned to lower grade stockpiled material to blend into their mill feed, according to Melbourne-based consultants Surbiton Associates.

The country produced 73 tonnes of gold in the three months ended Sept. 30, down from the 75 tonnes produced in the previous quarter.

“It is no surprise that gold production may fall when prices are high,” Sandra Close, Surbiton’s director said in a release. “Treating some lower grade stockpiled ore results in fewer ounces being produced, with a consequent rise in the cost per ounce of production. However, this is a sensible and rational means of optimizing life-of-mine and profitability.”

Surbiton pointed to Northern Star Resources (ASX: NST) as one example. The company’s treatment plant at the Super Pit in Western Australia’s Kalgoorlie region processed about 600,000 tonnes more than was mined in the third quarter.

“This suggests that the operation took advantage of the higher gold prices to treat some considerably lower-grade stocks,” the consultants said, noting that the head grade declined from 1.5 to 1.3 grams per tonne gold and output was down by 27,000 ounces.

Another example was Newmont’s (TSX: NGT; NYSE: NEM; ASX: NEM) Boddington operation in Western Australia, the largest gold mine in the country. The company mined 6.3 million tonnes of ore in the third quarter but treated 8.4 million tonnes, Surbiton noted, “with the difference of 2.1 million tonnes presumably coming from stockpiles.” The result: grades fell by about 5% and production by about 10,000 ounces.

Mind the dollars

“Some analysts and commentators seem to think that lower gold production and higher costs per ounce indicate that an operation is in trouble, or that the management is poor,” Close said. “However, there is another rather more obvious explanation.”

Other important factors at play include the U.S. dollar to Australian dollar exchange rate, which adds to the gold price volatility, and hedging.

“The wild swings in gold prices over the last few months show that a degree of hedging provides some insurance against sudden price changes, especially for locally listed producers,” she continued. “This can be achieved through the sensible purchase of gold put options, which give the purchaser the right, but not the obligation, to sell their gold at an agreed price.”

For instance, if the gold price in the market is above the agreed price, she explained, the producer sells gold into the market and lets the put option expire. But if the market price is below the agreed price, the producer exercises the put option and sells at the higher agreed price.

Gold prices in September jumped significantly. Spot gold was US$2,630 per oz. at the end of the month, up from US$2,499 per oz. at the start of September. At the end of October, the price peaked at US$2,790 per ounce, before falling to US$2,600 per oz. by the end of November