It’s fair to say the local gold sector has had better weeks. Three of its constituents in particular.
Updates from Dacian Gold, St Barbara and Ramelius Resources this week contained the sort of bad news those following this sector have not been accustomed to for years.
In two of these cases, the problems could be enough to damage revenue, earnings and even the companies’ futures.
The factors hitting the trio are not new – just the conjunction and their impact.
They include difficult mining conditions proving too much, rising inflation/costs and interest rates, some third-party interest and operational (especially Covid and labour shortages) and weather-related problems.
In an industry update this week, S&P Global has warned that rising inflation is boosting the All In Sustaining Costs (AISC) of gold producers (and all miners for that matter).
“Multidecade-high inflation rates have had an impact on gold producers’ all-in sustaining costs, particularly in 2022, exacerbated by Russia’s invasion of Ukraine.,” S&P said.
“We expect production to increase almost 5% in 2022, with producers’ profit margins under pressure from rising costs.“
But S&P said despite this the “outlook is projected to remain positive in the medium term as inflation reined in.“
S&P did make the point however that gold prices have not traded very strongly in the past year or so – the August 2020 all time high of $US2,078 an ounce was not regained in the wake of the Russian invasion of Ukraine in late February.
Some analysts see the limited range – from just over $US1,800 an ounce to just under $US2,000 an ounce – as evidence gold is suffering from its own stagflation.
Of course, rising interest rates and the big run up in the value of the US dollar in 2022 has not made gold’s progress any easier, but the real worry should be on the costs side.
That’s why miners’ AISC figures for the year to June and forecasts for 2022-23 – not headline profits, price forecasts or dividends – should be the focus in the coming June 30 reporting season for investors.
There’s a growing feeling that more and more producers of all sizes are now battling rising costs outside their control – chemicals, energy (especially diesel and electricity) and labour shortages.
Dacian Gold lost long-time CEO Leigh Junk last week. The company also announced it would stop mining at the Jupiter deposit of its Mount Morgans open cut mine in the WA goldfields within the month, blaming rising costs as it looks to scale back.
New CEO Dale Richards will keep Dacian’s underground operations going until developed stopes have been mined in the first quarter of the new financial year, with open pit mining at its new Redcliffe hub expected to start once approvals have been granted.
Dacian’s new direction won’t become clear for several months, but before then there will be a lot of red ink to discuss when the annual results and a new strategy statement become available.
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Ramelius Resources surprised on Thursday with a small production downgrade for the year to June 30, but it was enough to raise questions about the outlook for it and other companies in the WA goldfields.
Ramelius blamed wet weather, labour shortages (thanks to Covid) and difficulty in transporting product in its area of the gold fields around Mt Magnet and Edna May.
“Due to more persistent rain than forecast, especially recently, on some of the haulage routes to both the Mt Magnet and Edna May operations, ongoing staff shortages due to COVID / influenza and a lower than forecast head grade from Tampia, it is expected that gold production for FY22 will fall marginally short of the current guidance range of 260,000 – 265,000 oz.,” Ramelius told the market.
“This is despite the best efforts of the Ramelius and contractor teams in a challenging operating environment across the Western Australian resources industry.
“The production estimate for FY22, based on gold outturns received this week and updated road haulage and head grade estimates, has been revised down to 255,000 to 260,000 oz.”
That’s only 5,000 ounces less than forecast (worth around $US90 – $US100,000 dollars in revenue), but it was the surprise of the announcement that made investors sit up and take notice.
Ramelius said that despite its revised production guidance, it is too early to provide a definitive view on the All-In Sustaining Costs for FY22.”
But it did say that at this stage “there is no reason to expect a change from the previously provided range of A$1,475 – $1,525/oz, though likely at the higher end.”
Ramelius says it will confirm the actual results for 2021-22 and provide guidance for 2022-23 when the June Quarterly report is released later next month.
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Last of all, St Barbara shares were beaten lower this week after the company sprang two major surprises on investors.
First up the company has stopped the approvals process for its Simberi expansion at its mine in the New Ireland region of PNG.
This is supposed to expand the mine’s operation to new areas and extend its operating life.
But with inflation and costs rising and some interest from third parties (not identified by the company in the ASX release) it seems there are second thoughts about the idea.
St Barbara indicated in this week’s announcement that it is looking at costs across the company and at its three major assets.
It wants to look again at costs for the Simberi expansion and also to talk to the ‘third parties’ who have been sniffing round.
It had been ready to press the ‘go’ button for the expansion of the mining area but that’s now off for the time being
But St Barbara is confident the Simberi expansion will still happen – either with it or a third party.
The real surprise in the announcement was the tailings dam and disposal problems at the mining operation on Nova Scotia in Eastern Canada.
The mining operation 80 kilometres north-east of Halifax, was only picked up around three years ago, so the news of the tailings dam capacity concerns, sounds a bit alarming.
But it seems St Barbara has run into problems with local regulators who have expressed some concerns about the tailings processing and storage side of the operation.
As a result, St Barbara now faces a potentially serious shortage of tailings dam capacity because of these regulatory concerns.
A temporary solution is available – at a cost of $A6 million – which would give an extra year’s storage which would allow St Barbara to talk to regulators. But approval would have to be given quickly to allow the work to be carried out and the wall raised to provide more capacity in the next couple of months.
That would give St Barbara around a year to sort out the concerns, reach agreement with regulators and then implement whatever changes are needed.
Without the temporary wall in place, the mining operations could be forced to end by the September quarter.
And finally, St Barbara is cutting costs by closing offices in Australia and laying off staff as it clearly battens down the hatches.
But, as is the case with Dacian and its existing mines, St Barbara has a future based on its gold mining and exploration activities in the Leonora area of WA.
St Barbara has the Gwalia underground mine at its Leonora Operations in WA (its cornerstone asset, with 2.1 million ounces of gold in reserves at 31 December 2021). That has been operating since 2008.
“In 2022 we acquired Bardoc Gold, adding the well-advanced Zoroastrian and Aphrodite deposits to our presence in the Leonora province.”
St Barbara is obviously preparing for a leaner future, as is Dacian. Ramelius is just hoping for drier weather.
The sudden emergence of the trio of problems should be a reminder to investors that costs in the mining sector are going to be THE big item to watch in coming reports.
