The Northern Miner Vol. 83 No. 20 July 14, 1997
Gold reaches 12-year low -- Central bank sales depress price to US$314
BY JAMES WHYTE
Maybe it's a good thing Busang wasn't real.
Recent days have seen the gold price fall to levels not seen since 1985, as sellers crowd the market
and buyers bide their time.
The usual suspects in the assault on gold are the Western central banks, which have been consistent
sellers over the past decade. The current price collapse has been traced to a July 3 announcement
by the Reserve Bank of Australia that it had sold 167 tonnes (about 5.4 million oz.) into the spot
market over the past six months.
The immediate response was panic. Fearing that the sale could forshadow further sales from the
central banks, producers locked in sales on the futures markets, forcing sellers of physical metal to
cut prices on the spot market. The July 4 morning fix on the London bullion market was US$325.20
per oz., a decline of US$7.35 from the previous afternoon fix. Traders passed a nervous weekend,
then grabbed the phones once more at the opening on July 7, sending the yellow metal down to
US$318.75. The spot price touched US$313.95 in New York trading on July 8, its lowest price
since July 11, 1985.
The London fix on the morning of July 9 was US$315.75, its lowest figure since July 12, 1985; by
the afternoon fix, there had been a slight rally to US$317.30. The closing bid price on New York
was US$317.70, and, at presstime, pre-Market bids in the Far East were US$318.70.
A trader at one of the Big Five London bullion merchants told The Northern Miner that potential
buyers were probably still on the sidelines, waiting for the price to touch bottom. "Asia is the main
market for physical offtake, but these guys are not going to buy at just any old level. If they think it's
going to come down further, they're going to wait and then step back in."
Neither did he think it likely that the commodity funds might change from bears to bulls: "From the
funds' point of view, they're making money on a daily basis in the contango market, so if they're
short the metal, it pays them to be short still."
A Hong Kong-based bullion trader with another Big Five merchant said there had been little
increase in physical demand for gold, and that most of the sales in recent days had been absorbed
by short sellers taking profits and covering existing short positions. A third trader, now retired,
pointed out that the jewelry industry (which, along with electronics, is the principal end-user of gold)
normally is not a heavy buyer until August, and that it had long been understood that slow industrial
offtake made July the best time of year to short gold.
Their views seem to be borne out by the pattern of trading over recent days, with rallies in the
London spot market as short sellers took profits, followed by declines during the New York trading
period as futures traders depressed the price.
There remains a strong sentiment that 1997 could see large-scale unloading of gold by European
central banks. Low book valuations of central bank gold reserves give governments an incentive to
sell at market prices and so show a profit for the treasury; with European monetary union targets for
deficit reduction looming, the German, Belgian and Dutch central banks have all sold bullion over the
past year, and the Swiss, though unaffected by the monetary union, are also rumored to be selling.
Worldwide public-sector sales last year were 239 tonnes (7.7 million oz.) -- about a tenth of total
mine production.
Royal Oak affected
The effect the low price might have on high-Cost gold producers is plain enough; 21 of the Western
World's major producers have cash costs higher than the present spot price. Of these, 18 are South
African, including such names as East Rand, Vaal Reefs, and Free State; rounding out the list are
two Australian miners, Newcrest Mining and Kidston Gold, and Royal Oak Mines (RYO-T).
Graham Eacott of Royal Oak acknowledged that the price will likely put the Colomac mine in the
Northwest Territories out of business. Royal Oak, which had already announced it would take a
US$30-Million writedown of the asset on its next quarterly report, is expecting cash costs of
US$376 per oz. at Colomac this year, and, with declining reserves and grades, Royal Oak thinks
the mine is near the end of its life.
Colomac faces another problem in that it has road access only three months of the year. "To take in
supplies for 1998, from January through March of this year, there has to be incentive . . . reserves
that are economic, plus cash costs that are low enough to make it worthwhile, and neither of those
two criteria would be met."
Uncertainty at Colomac
Exploration drilling below the pit floor still offers some potential for building a new reserve.
Expanding the pit to include new reserves might allow for continued operation, but exploration has
not advanced far enough to justify development.
Royal Oak had already announced that its Hope Brook mine in southwestern Newfoundland would
close at the end of September, but, said Eacott, "we're now looking at the end of July, because the
reserves are running out." He said Royal Oak's other operations notably the Giant mine in
Yellowknife, N.W.T. and the Pamour division in Timmins, Ont. -- are protected by forward sales at
US$395 per oz. "We are protected this year, but exposed thereafter."
Several Quebec operations might be threatened, including the Silidor mine near Rouyn, Que., owned
jointly by Battle Mountain Canada (BMC-T) and Cambior (CBJ-T). Silidor posted a cash cost of
US$333 per oz. in 1996, and, in any event, dwindling reserves are expected to result in closure at
the end of 1997. TVX Gold (TVX-T) has already announced that the Casa Berardi mine, west of
Joutel, Que., will shut down unless it can find a buyer.
It is not yet clear how the gold market might affect McWatters Mining (MCW.A-M) in its
agreement to buy from Placer Dome (PDG-T) the Kiena and Sigma mines, both of which are in Val
d'Or, Que. Costs at Sigma have risen steadily, touching US$436 per oz. in 1996, while Kiena's cash
cost was much lower, at US$247 per oz.; both operations have shown lower costs this year.
McWatters must arrange a US$70-Million financing to take over the two projects and the gold price
slump is not helping with that effort.
In Ontario, the Macassa mine, near Kirkland Lake, has traditionally been a low-Cost producer, but
a rock burst in April may have rendered some reserves unrecoverable. Owner Kinross Gold (K-T)
suspended operations in early June to address safety concerns raised by the Ontario Ministry of
Labour, and the comapny has not yet disclosed its plans for the mine. If safe mining will increase
cash costs significantly and if reserves in lost stopes cannot be recovered, Macassa may close.
Another Ontario producer which has seen better days is Goldcorp (G-T), whose Red Lake mine is
still shut down by a strike. The cash cost in 1996 was US$309 per oz., but Goldcorp expected to
decrease that substantially by developing new higher-grade reserves on the down-plunge extension
of Placer Dome's adjoining Campbell orebody.
Bear |
