Gold mining in Australia: 50 years of growth

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After the gold rushes of the late 19^th century, gold played a lesser role in the Australian economy of the early 20^th century. It wasn’t until the 1970s and early 1980s, with deregulation of the gold market and the dramatic increase in the price of gold, that Australia’s gold industry experienced a resurgence. This renaissance was further buoyed by technological advancements in both exploration and mining of gold, which made mining lower grade ores economically viable.

Today, gold still remains an important part of the country’s economy. Exports of the precious metal in 2017 generated $18.3bn in revenue for Australia.

At present, the value of the precious commodity is being supported by growing global tensions, such as the US-China trade war and the Australian dollar hitting a decade low after the Reserve Bank of Australia cut interest rates to a record low.

Most recently, fears over a global recession, heightened by threats of trade wars and political unrest, have seen the gold price rocket again - some investors are saying it could reach $2,000 an ounce. Australian financers are also favouring gold, a traditional investment safe haven.

Both of these factors have incentivised investment in new and existing projects.

Most recently, the board at Newcrest’s Cadia mine, one of Australia’s largest gold mining operations, approved an A$685m expansion of the NSW mine in October to increase plant capacity to 33 million tonnes (mt) a year. According to the company CEO, the plans would add 1.8 million ounces of gold output, 67,000 tonnes of copper output, and increase free cash flow by A$800m over the life of the mine.

This is the first stage of a two-phase programme to boost the mine's production. The second stage could see an expansion of the plant to 35 million tonnes at a cost of another A$180m, subject to a feasibility study. In the 2018-2019 financial year, the mining complex produced 912,778 ounces of gold.

Elsewhere, Gold Road Resources and the Gruyere Mining Company said the Gruyere Gold Mine in Western Australia had reached commercial production at the end of September. The joint venture now anticipates gold production to be at the upper end of 75,000 to 100,000 ounces.

Earlier in the year, AngloGold Ashanti Australia and Independence Group NL approved development of the Boston Shaker Underground Project at the Tropicana Gold Mine in Western Australia. A feasibility study confirmed the viability of underground mining. First gold production is scheduled for September 2020. The Tropicana gold project, which was discovered in 2005, holds an estimated 57.1 mt of proven and probable reserves graded at 2.12g/t.

Other gold projects that have benefited from renewed investment interest in Australia’s gold sector include Kirkland Lake's Fosterville mine, which had a significant ramp-up initiative that raised the 2019 guidance from between 390,000oz and 430,00oz to between 550,000oz and 610,000oz.

Newmont’s Boddington mine in Western Australia, which produced 689,000oz in the last financial year could also benefit from the current investment climate and strong gold price.

Sabrin Chowdhury, senior commodities analyst for Fitch Solutions, says the mining company will be a large beneficiary of improving gold prices, due to the firms ‘position as market leader’.

“That affords it the resource capacity to commit to investing in the longevity of its mines,” she says.

However, Vince Madden-Scott, a senior research analyst at Wood Mackenzie says that while the Australian gold sector has achieved annual production growth in recent years, it has been largely driven by companies exploiting their existing reserve base with few new discoveries of note.

In fact, despite both majors and juniors companies spending significant amounts of money on exploration, in the last 15 years there have been only two significant greenfield discoveries, Tropicana and Gruyere, neither of which ‘are considered global tier one projects’, he says.

“The lack of success is reflective of a fairly mature gold industry. The ‘low hanging fruit’ has long been exploited in Australia and most new discoveries are generally more remote, deeper, smaller scale, lower grade, or more geologically complex making them less attractive and harder to mine profitably,” says Madden-Scott.

“There are potentially exploitable gold projects out there but the industry is crying out for technological breakthrough that would allow producers to mine lower-grade ores more efficiently or for new processing technology allowing producers to mine more geologically complex ores like sulphides in a cost-effective manner,” he adds.

Autonomous drilling trials at Tropicana are underway to see if it could boost production efficiency by reducing the number of necessary operators and drills as early as 2020.

Furthermore, miners are seeing increased opposition to new mining projects, even in towns made rich by the precious metal. And the Victorian Government’s proposed 2.75% mining royalty on the state's gold sector threatens to negatively impact the sector’s competitiveness, according to those in the industry.

These challenges have seen Australian miners increasingly look offshore for better opportunities to replenish their reserve base, says Madden-Scott.

“We see this as a trend that will continue, driven by the strong balance sheets and technical capabilities of Australian companies and the relatively poor domestic prospects for exploration success,” he says.

However, Madden-Scott says new mergers and acquisitions, the other means by which companies have traditionally replenished their reserve base, are unlikely due to the strong gold price resulting in a healthy financial position for most Australian gold miners.

Madden-Scott says that unless there is some significant near-term exploration success, “we expect the production growth in Australian gold mining to slow and possibly peak in the coming years.”

However, in the immediate future, at least, others anticipate gold output from Australia to remain strong.

Based on improving gold prices and a solid project pipeline, a new report by Fitch Solutions says Australian gold production will reach 10.9 million ounces by 2020. Production is expected to grow 6% year-on-year in 2019 and a further 3% in 2020.

Fitch Solutions forecast gold prices to average A$1,375/oz for 2019. This is valued at nearly A$23bn for the 2019 financial year, a boon for miners.

Chowdhury, author of the report, however, agrees that a lack of exploration projects could potentially hamper the sector's long-term growth.

Nevertheless, Australia’s gold miners probably aren’t worrying yet, and are happy to make hay while the sun still shines. But will no doubt be acutely aware that without a technological or exploratory breakthrough, the future may see a return to a less lucrative gold mining climate.