ANALYSIS-Low prices may force gold mine cuts
By Marius Bosch
LONDON, June 1 (Reuters) - Current 20-year low gold prices will have to be sustained for several months before producers consider closing down some operations, analysts said.
Most of the mines at risk are in the world's biggest producer South Africa, where cash costs are the highest in the world due to dwindling ore reserves and the ever-increasing depth at which gold is mined.
According to industry consultants Gold Fields Mineral Services, South Africa's average cash cost in 1998 was $246 an ounce, compared to $190/oz in Canada, $205/oz in Australia and $185/oz for U.S. gold miners.
"A sustained period of low gold prices, say $250 per ounce would see production fall substantially below the levels forecast in our base case.
"Some 50 to 100 tonnes of existing production would be lost in order to restore the cost price relationship and approximately 150 to 200 tonnes of new project production would not be developed," said Mark Fellows, analyst at mining and metal industry consultants Brook Hunt in a recent research report.
The low gold price compared to operating costs implies that some mine cuts were needed across the world, said Macquarie Equities Ltd precious metals analyst Kamal Naqvi.
"In a number of cases, producers with reasonably solid hedging or financed by hedge books may well be in a situation where they have enough hedging to survive at current prices or they are forced to continue producing to satisfy their hedge book," Naqvi said.
But a number of producers who were not sufficiently hedged might be in trouble.
"There will be a number of mines where they have insufficient hedging and are being impacted severely by current low prices, and unless they are able to get a decent forward price at current levels, they must be considering their options in terms of potential closures," Naqvi added.
Many gold miners lock in higher prices by selling future production forward.
But even with the proceeds of forward sales, the depressed gold price will impact on producers at some time.
"I think that if prices remain at sub-$270 levels for the next six months, then we will start to see some level of closures. But my feeling is that we won't see sufficient closures to really spark some type of turnaround on the basis of production cuts until prices have gone quite a bit lower," Naqvi said.
The gold price has fallen steadily since the beginning of the year, with market sentiment turning increasingly negative amid fear of central bank and IMF gold sales.
Britain's announcement on May 7 that it would sell more than half its 715 tonnes of gold reserves saw the price fall more than $20.
Gold fixed at a fresh 20-year low of $265.50 a troy ounce in London on Tuesday morning amid reports that Australian producers had sold metal.
Fellows said at gold prices of around $330 per ounce, which approximates the 1998 average price of $294/tonne used to construct Brook Hunt's base case forecast, mine production will continue to grow to 2003.
But the outlook remained bleak if prices continue to fall with new gold mine projects the most vulnerable.
Fellows said a Brook Hunt study of 90 projects which may come onstream after 1998 showed that many of the projects will not give returns, even at a gold price of $300 an ounce.
"Many of them, possibly amounting to 200 tonnes of new production, will not be developed at current price levels. Many are in fact already on hold, awaiting higher price
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