Major gold producers struggle to maintain production levels during a period of high prices

By Steve Fiscor, Editor-in-Chief

For the 10th consecutive year, gold prices have increased. Global economic uncertainty throughout much of 2011 allowed miners to continue to capitalize on a bull run that began in 2001. The mining industry’s unhedged exposure to rising gold prices has improved profits margins and cash flow. Demand for bullion remains strong, especially from large emerging markets like China and India. Central banks and investors alike seek to diversify portfolios with gold.

The second half of 2011 was a wild ride for gold prices. A third quarter rally pushed the price of gold to a record of $1,921/oz. Gold ended 2011 at $1,563/oz, up 10% with an average price of $1,590/oz for the year. The possibility of an American default as politicians debated an increase in the U.S. debt ceiling, prompted a downgrade of U.S. debt, which took gold prices higher. Gold prices fell by 15% after politicians reached a temporary fix. Soon afterward, Eurozone financial concerns emerged, gold prices fell further as investors fled from commodities in a massive sell-off. Gold quickly regained its upward momentum as 2012 began.

Despite problems in both Indonesia and Peru, it’s believed that gold miners will produce approximately 2,800 metric tons (mt) of gold in 2011, or about 100 million oz, an increase of around 4% over 2010. In general, mines are going deeper and ore grades are declining, which means miners must extract and process more ore. On top of these conditions, discovery rates are also declining. Gold miners are investing heavily in exploration programs, and in increasing capacity and optimizing existing operations.

Barrick Discovers More Nevada Gold
Barrick Gold will produce 7.6-7.8 million oz of gold in 2011 at a total cash cost of $460-$475/oz. The leading gold producer recently announced two significant gold discoveries on the Cortez property in Nevada, Red Hill and Goldrush. The development of the Pueblo Viejo and Pascua-Lama mines continues to advance with first production anticipated in mid-2012 and mid-2013, respectively. The two mines should average 1.4-1.5 million oz/y in gold production during the first five years of operation at a relatively low cash cost.

“We remain on track to achieve our targets, one of which is to have one of the lowest cash cost profiles among the senior gold producers,” said Aaron Regent, president and CEO, Barrick Gold. Recent drilling continues to expand the mineralization at the two discoveries in Nevada, Regent explained. Infill drilling between the two deposits is advancing the possibility that they will merge into a single deposit.

Barrick’s North America region continued to perform well during 2011. It is expected to produce 3.3-3.4 million oz in 2011, at $425-$450/oz. The Cortez Hills open-pit mine was in a higher waste stripping phase and is now entering a higher grade area. The Goldstrike operation transitioned to a higher stripping phase in the second half of 2011.

The company’s South American business unit performed ahead of plan, producing 1.85-1.90 million oz at a cash cost of $360-$380/oz. As a result of mine sequencing, Lagunas Norte’s production exceeded plan. Veladero also met the company’s production and cost guidance ranges. In the South Pacific, the Porgera mine was impacted by lower underground production, primarily due to equipment availability issues and unplanned maintenance.

During 2011 exploration, Barrick invested $370-$390 million in exploration with most of the activity weighted toward resource additions and reserve conversion at and around mine sites mostly in Nevada.

At the Pueblo Viejo project in the Dominican Republic, first production is anticipated in mid-2012. Barrick’s share of annual gold production in the first full five years of operation is expected to average 625,000-675,000 oz at total cash costs of $275-$300/oz. Total mine construction capital is estimated at $3.6-$3.8 billion.

Project construction is more than 85% complete following a delay caused by damage to the partially constructed starter tailings dam facility due to a heavy rainfall event in May 2011. Remediation of the starter tailings dam continues to progress. The mine has received all of the necessary approvals to allow construction of the dam to its full height. Brick lining of all four autoclaves was completed. Nearly all of the concrete has been poured, about 95% of the steel has been erected and more than 7.6 million mt of ore has been stockpiled. As part of a longer-term, optimized power solution for Pueblo Viejo, a plan is under way to build a $300 million dual-fuel power plant. The new plant is expected to provide lower cost, longer term power to the project.

Sitting on the border between Chile and Argentina, Pascua-Lama is expected to achieve first production in mid-2013. Average annual gold production is expected to be 800,000-850,000 oz in its first full five years of operation at negative total cash costs of $225-$275/oz, assuming a silver price of $25/oz. Average annual silver production for the first full five years is expected to be about 35 million oz.

Barrick has targeted growth in production to approximately 9 million oz of gold within the next five years.

Newmont Brings Gold Quarry Back Online
Newmont Mining Corp. expects to produce 5.1 to 5.3 million oz of gold at $560-$590/oz during 2011. Potentially lower grades due to mine sequencing at Gold Quarry and lower grades at Exodus in Nevada are impacting production and the Boddington mine in Australia has seen an increase in operating costs.

In North America, gold production from Newmont’s Nevada operations decreased 6% due to lower mill grade ore and throughput, partially offset by higher leach placement and recoveries. Open-pit ore tons mined increased 167% as the remediation of the Gold Quarry pit slope failure was completed.

The Yanacocha mine in Peru is expected to produce 650,000 to 670,000 oz at a cost of $560-$600/oz.

Boddington produced 166,000 oz during the third quarter. Gold production decreased due to lower mill grade, but was partially offset by higher mill throughput. Costs continue to increase due to the lower gold grade, higher royalty costs and diesel prices. Some of the increase was partially offset by higher by-product credits.

Batu Hijau in Indonesia produced 66,000 oz during the third quarter, a decrease of 37% from the same period last year. The company attributed the decrease to lower mill grade, throughput and recovery as a result of processing more stockpiled material compared to higher grade Phase 5 ore in 2010 and the completion of mill motor replacements. Waste tons mined increased 104% as Phase 6 waste removal continues as planned.

Newmont expects 2011 attributable gold production for Batu Hijau of approximately 140,000 to 160,000 oz at CAS of between $440 and $460/oz.

The Ahafo in Ghana produced 146,000 oz at cash cost of $501/oz during the third quarter, a 6% decrease. Again, lower mill grades were partially offset by higher recovery. In addition to the lower production, costs were also pushed higher by increased labor, diesel and royalty costs. Newmont expects Ahafo to produce 560,000 to 590,000 oz in 2011 at a cost of $470-$500/oz.

Newmont invested nearly $3 billion in operations in 2011 much of it (40%) associated with major project initiatives, including further development of the Akyem project in Ghana, the Conga project in Peru, Hope Bay in Canada, and the Nevada project portfolio.

Weather and Safety Impact AngloGold Ashanti
AngloGold Ashanti is implementing a new operating model to improve productivity across 20 mines and a portfolio of development projects. Its Continental Africa operations posted some great numbers last year, with Geita in Tanzania being the largest contributor at 149,000 oz at a cash cost of $473/oz. Geita experienced a “once-off” benefit of higher-grade feed to compensate for the SAG mill shutdown. The company also noted strong performances at Iduapriem in Ghana and from the Americas, where Cerro Vanguardia in Argentina was once again a standout as the group’s most efficient producer.

Drought continued to impact production at Cripple Creek in Colorado, while Sunrise Dam’s recovery from Australian flooding in the first half of the year was again slower than anticipated, as was the ramp-up of production following the five-day wage-related strike at the South African operations. In addition, winter power tariffs, higher wages, increased royalties and lower by-product credits also contributed to cost pressure in South Africa.

Tragically, three fatalities were recorded in South Africa. The company continues to invest in improving its long-term safety performance, with the benchmark all injury frequency rate of 9.51 per million hours, the lowest in the company’s history. All of this this translated to a fourth quarter estimated production of approximately 1.1 million oz at a total cash cost of approximately $790/oz.

Given the increased safety stoppages in South Africa, the ongoing water shortages at Cripple Creek and the slower ramp up at Sunrise Dam, full year 2011 production is now estimated to be around 4.3 million oz in 2011. Total cash costs are estimated at between $735-$745/oz on the basis of slightly weaker local operating currency assumptions for the year.

Gold Fields Suffers Production Disruptions
Gold Fields Ltd. expects to produce 3.5 million gold equivalent oz (geo) in 2011. Total cash costs are expected to be about $800/oz. Production decreased during the fourth quarter of 2011 as a result of disruptions in Ghana due to power outages and a slower milling rate at Tarkwa. In the South Africa region, production was impacted by stop and fix interventions at Beatrix and a lower underground grade at South Deep due to changes in the mining mix needed to increase flexibility. Gold equivalent production at Cerro Corona, in Peru, was adversely impacted by lower copper prices relative to the gold price.

The company experienced an interruption in South African production in July that occurred during the five day national industrial action over the wage negotiation process. During the second quarter of 2011, two significant seismic related accidents at the Kloof Driefontein complex resulted in production stoppages due to safety interventions. In the Australasia Region, production was affected by a week-long, unplanned mill-outage at St Ives. Remedial actions in respect of the seismic-related accidents and the unplanned mill-outage were satisfactorily completed during the latter part of the second quarter of 2011.

Newcrest Dewaters Pits After a Tough Second Half
Newcrest Mining Ltd. recently reduced gold production guidance to 2.4–2.6 million oz/y due to continuing production disruptions at Cadia Valley and Lihir, and lower feed grades and recoveries at Telfer. This is around 6% below the original minimum guidance level. Increased costs at Gosowong resulting from a higher exchange rates and additional costs associated with a tragic helicopter accident in August are expected to be offset by lower than planned site costs at Cadia Valley and Telfer.

Newcrest’s two major projects at Lihir and Cadia Valley remain on schedule and within budget. At Lihir, production for the first two quarters of FY 2011-12 is expected to be approximately 100,000 oz lower than planned and it is unlikely this production will be recovered during the remainder of this financial year. The lower production is a result of the extended time required to complete the total plant shut down during August and the extreme rainfall during September which impeded production from high grade positions in the open-pit until mid-November. Water pumping capacity in the pit has now been doubled with a further upgrade planned soon.

At Telfer, production for the first two quarters is expected to be approximately 50,000 oz lower than planned which is unlikely to be recovered this financial year. Mill throughput rates have been in line with plan, according to Newcrest, however lower feed grades and material movement from main dome open-pit, coupled with lower metallurgical recoveries associated with the commencement of west dome ore feed have impacted production. The scheduled commissioning of Jamieson Cells in January and planned installation of an Isa Mill later in FY2011/12 are expected to improve ore recoveries.

Cadia Valley production for the second half of 2011 is expected to be approximately 30,000 oz lower than planned, primarily due to a ground slip in the open-pit and heavy rainfall. The slip occurred low on the south-east wall of the open-pit and blocked a turn on the haul road preventing access to the bottom of the pit. Access to the pit has been re-established. The pit needed to be dewatered and mining was expected to resume in mid-January 2012. The mill continues to operate at capacity using low grade stockpiles. The company says recovery of the lost production is unlikely.

The Lihir Million Ounce Plant Upgrade (MOPU) is progressing to plan. A major tie-in to the existing process was completed in August. There are no major project plant shut downs scheduled at Lihir during the remainder of the 2011/12 financial year.

A new 70 MW fuel oil power plant was energized in November and is now supplying power from the first two of its 9 MW generating sets. This has occurred to plan and commences the sequential start-up of the expansion project during calendar year 2012. The new crushing circuit is expected to be energized in February, followed by the milling circuit and the new oxygen plant and autoclaves which enable design throughput to be achieved. The project remains within budget (US$1.3 billion) and on time for completion by the end of calendar year 2012.

Development of the Cadia East panel cave remains on track with the hydro-fracturing of panel cave ore successfully completed and pre-conditioning blasting continuing. The next phase of delivery for Cadia East remains the completion and commissioning of the underground conveyor, with undercut and draw bell development which will occur sequentially over calendar year 2012.

Kinross Rethinks Project Sequences
Kinross Gold expects 2012 to be a good year. Gold production should increase with the planned acceleration of Fort Knox heap leach capacity, expected full-year operation of the third ball mill at Paracatu, and increased production at Tasiast. These expected gains are anticipated to be partially offset by a planned decline in grades, particularly at Kupol and Kettle River-Buckhorn. The company anticipates capital expenditures in 2012 of approximately $1.3 billion related to growth projects, primarily for Tasiast. It will also spend $220 million on exploration.

In 2011, Kinross produced approximately 2.6 million geo. The company’s average 2011 production costs were approximately $600/geo. In 2012, the company expects to produce approximately 2.6-2.8 million geo from its current operations. Production costs are expected to be in the range of $670/oz-$715/oz for 2012. Higher consumable and labor costs, and an expected decline in grades at certain existing mines will increase costs.

The company’s three major growth projects at Tasiast, Fruta del Norte (FDN) and Lobo-Marte will require significant capital expenditures over the next several years. In light of cost escalation, and a better understanding of the Tasiast orebody and potential for alternative mining and processing rates and sequences, Kinross has elected to conduct a comprehensive optimization process with the aim of improving capital efficiency, project sequencing and investment returns. As a result, previously disclosed scoping and pre-feasibility level assumptions and forecasts could be revised, including those related to project sequencing and start-up dates. The company expects the timetables for the Lobo-Marte, FDN and Tasiast feasibility studies will be extended.

As far as original Tasiast scoping study, various ore processing options have emerged following a recent infill drilling program, which provided a better understanding of the geology and distribution of the gold mineralization. The drilling program identified a higher-grade core and significant amounts of lower-grade halo material which may be better suited to a heap leach. Some of the near-surface lower-grade material may be more profitably developed with less capital intensive heap leaching in combination with carbon-in-leach milling. Engineering analysis indicates that heap leaching may offer significant benefits if developed early in the Tasiast expansion sequence.

Goldcorp Starts to See the Full Potential at Peñasquito
Goldcorp produced 2.5 million oz in 2011 and the company believes it will reach 2.6 million oz in 2012. Increased production at Peñasquito will be offset by lower production at Marlin as the mine transitions to 100% underground mining. As part owner, they will also reap the benefits from the launch of Pueblo Viejo.

Consistent production levels at other mines throughout the portfolio will create a stable foundation for the years ahead, explained Chuck Jeannes, president and CEO, Goldcorp. “Peñasquito met its production target and continued to emerge as the linchpin of our asset base in 2011, with strong operating cash flow in just its first full year of production,” Jeannes said.

Also in Mexico, the Los Filos mine achieved record production of 336,500 oz while continuing with its excellent safety performance. Red Lake in 2011 remained the anchor of Goldcorp’s overall gold production at very low cash costs while Porcupine and Musselwhite mines in Ontario provided stable production and exciting exploration results. In Guatemala, the last year of open-pit mining in the highest grade portion of the pit at Marlin resulted in record gold production of 382,400 oz.

At the Red Lake mine in Canada, production is expected to benefit from an increase in tons mined from lower-grade zones consistent with a long-term initiative to use excess milling capacity. The focus in the year ahead will remain on enhancing the overall flexibility of the High Grade Zone through continued investments in development.

Construction of the 5-km haulage drift to connect the Cochenour shaft with the Red Lake mine on the 5400 foot level is about one-third complete and targeted for two-thirds completion by year-end 2012. Upon completion, the drift will enable ore from the Cochenour/Bruce Channel deposit to be hauled directly to the Red Lake mine for processing at the existing mill facilities. Forecast life-of-mine gold production from Cochenour is approximately 250,000 to 275,000 oz/y at low cash costs commencing near the end of 2014.

At Peñasquito, both 50,000 mt/d SAG lines are routinely operating at capacity. During the month of December throughput reached an average of 107,000 mt/d and reached a new record of 140,000 mt on December 26. The supplemental ore feed system to supply pebble feed to the 30,000 mt/d high pressure grinding roll circuit will be completed shortly and hauling of additional material to the tailings dam walls is now complete. Ramp-up to full 130,000 mt/d design throughput remains on track for the end of the first quarter of 2012.

With mining progressing deeper into the heart of the sulphide ore body, higher grades and throughput rates are expected to drive a significant production increase in the year ahead. An in-pit crushing and conveying system will be commissioned in the second half of 2012. With expected production of 425,000 oz of gold, Peñasquito is forecast to become Mexico’s largest gold producer and the company's largest generator of cash flow in 2012.

The Los Filos mine in Guerrero state will continue to be a major contributor to Goldcorp’s overall production profile in 2012. Gold production is forecast to increase slightly to 345,000 oz. Exploration success continues to support the potential for significant additions in gold reserves at Los Filos over the longer term.

At Marlin in Guatemala, production in 2012 will decline consistent with the planned transition to an exclusively underground operation as mining in the primary open-pit is now complete. Stockpiled material with an average grade of approximately 1.1 g/mt is expected to make up approximately 40% of the mill feed at Marlin in 2012. The development of recent high grade discoveries in the West Vero zone will continue, with first production expected in the second half of 2012. Exploration success continues at the Delmy vein discovery adjacent to current underground mining operations. Access to the vein has been developed at three levels and two ventilation raises to the surface have been completed. Mining of the Delmy vein, which remains open along strike and at depth, began in late 2011 and is expected to contribute to Marlin production throughout 2012.

The high grade Cerro Negro deposit is positioned to be the next source of new gold production for the company in 2013. The project includes several high-grade veins located on the low-elevation Patagonian plains of southern Argentina. With production expected to average approximately 550,000 oz of gold in its first five full years of production, Cerro Negro is well-positioned as Goldcorp’s next cornerstone gold mine.

Goldcorp’s production profile is forecast to grow approximately 70% over the next five years to 4.2 million oz in 2016.

Polyus Gold Invests in More Production
Polyus Gold is the leading gold producer in Russia and one of the major producers of gold in Kazakhstan. For 2011, the company’s total refined gold production increased by 8% year-on-year to 1.5 million oz—the fourth consecutive year of increased production. The company reported that its Blagodatnoye mine operated at its designed efficiency (85% recovery rate) and exceeded throughput capacity. The Verninskoye mine was commissioned in December. Ongoing modifications to Mill-2,3 at Olimpiada resulted in higher recovery. The development work for the Natalka mine is on track: procurement started (mills and plant equipment under way), camp construction to be completed by March 2012. Commissioning of the mine is expected in December 2013.

Polyus Gold’s flagship mine, Olimpiada, implemented a series of measures aimed at increasing the recovery efficiency of sulfide ore and improving the bio-leaching process. A delay in the commissioning the final concentration step ofprimary concentrate from gravity concentrate for Mills-2,3 (completed in December 2011) and difficulty encountered in the commissioning of the second stage centrifuges introduced to dewater the biopulp at hydrometallurgical circuit of Mill-3, resulted in the expected recovery rate not being achieved.

In 2012, Polyus Gold plans to spend $594 million to construct the Natalka mine. Of this figure, $314 million is expected to be spent on procurement of the equipment for the plant and the mining fleet. As of late January 2012, the company already signed agreements for the delivery of the equipment for the total sum of approximately $143 million. The group plans to complete contracting of the equipment in April 2012, so that key construction fleet to be delivered in April-June 2012.

In 2011, the Olimpiada mine produced 566,000 oz of refined gold, compared to 585,000 oz in 2010. Gold output decreased primarily due to the decline in average grade. Mills-2,3 of Olimpiada mine were processing primary sulphide ore with an average grade of 3.43 g/mt, compared to ore with an average grade of 3.76 g/mt in 2010.

The Blagodatnoye mine produced 363,000 oz of gold, compared to 253,000 oz in 2010. The 44% year-on-year increase in gold output reflects successful ramp-up of the mine, which was commissioned in July 2010.

The construction of the Verninskoye mine was performed in difficult conditions, according to Polyus Gold, when the principal supplier of the project, FLSmidth Wiesbaden GmbH, failed to deliver equipment in time (flotation equipment, gravity concentrators, thickeners, etc). The 6 month-delay in shipment resulted in the mine’s commissioning in a short circuit mode, which was not planned initially.

During the first half of 2012 the plant is expected to produce gravity concentrate, which will be processed at an existing plant at the Zapadnoye mine. As of late January 2012, 98% of the project equipment had been shipped and is expected to be on mine site in March 2012.

Harmony Sells Evander
South Africa’s Harmony Gold Mining Co. Ltd. posted record profits in 2011. “The strength of the gold price together with improved operational efficiency supported our results,” said Graham Briggs, CEO, Harmony Gold. “As our growth projects come on stream, and our existing mines operate to tailored business plans, we remain confident of reaching our long-term targets.”

It was not all smooth sailing in 2011 for Harmony. Production was negatively impacted by a wage strike in August 2011, which resulted in approximately 500 kg being lost. Higher electricity (due to winter tariffs) and labor costs eroded profit margins.

During January 2012, Harmony decided to sell its interest in Evander Gold Mines Ltd. to a consortium comprised of Pan African Resources plc and Witwatersrand Consolidated Gold Resources Ltd., for R1.7 billion ($225 million). The Evander operations consist of the Evander 8 shaft, located in Mpumalanga. It also includes several potential development projects namely Rolspruit, Poplar, Evander Southand Libra. Harmony positioned the sales as move to further optimize its asset portfolio. The proceeds from the transaction will be used toward funding the development of Wafi-Golpu.

Pre-feasibility studies at Wafi-Golpu are progressing according to schedule. Key strategy milestones were reached in the selection of preferred strategies for mining, underground access, processing, port and power infrastructure. This has allowed work to commence on detailed engineering, cost estimates and schedules for procurement and construction for early works. At the end of the December 2011 quarter, seven drill rigs were operating with six engaged on extension of the Golpu orebody to the north and infill of deeper sections. One drill continued with geotechnical investigation drilling along the access decline route.

Disruptions Impact Gold Production at Grasberg
Freeport McMoRan Copper & Gold reached a new two-year labor agreement for PT Freeport Indonesia in mid-December 2011. Repairs to the damaged pipelines were completed and PT Freeport Indonesia has begun ramping up production. PT Freeport Indonesia is working cooperatively with the Government of Indonesia to address security issues. The production disruption from the labor issues (including the eight-day work stoppage in July 2011) and the damaged pipeline totaled 275,000 oz of gold for the year.

Freeport is projecting 2012 gold sales of 1.1 million oz, which would be lower than 2011 sales of 1.3 million oz because of mine sequencing at the Grasberg mine, as it transitions to a large-scale, high-grade underground ore bodies located beneath and nearby the Grasberg open-pit. In aggregate, these underground ore bodies are expected to ramp up to approximately 240,000 mt/d of ore per day by 2016.

The Deep Ore Zone mine, one of the world’s largest underground mines, has been expanded to a capacity of 80,000 mt/d of ore and a feasibility study for the Deep Mill Level Zone (DMLZ) has been completed.

The high-grade Big Gossan mine, which began producing in fourth quarter 2010, is expected to reach full rates of 7,000 mt/d of ore by mid-2013. Substantial progress has been made in developing infrastructure and underground workings that will enable access to the underground ore bodies. Development of the terminal infrastructure and mine access for the Grasberg Block Cave and DMLZ ore bodies is in progress. Over the course of the next five years, Freeport will invest $700 million per year on underground development activities.

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