Leading gold producers ramp up capacity to take advantage of high prices

By Steve Fiscor, Editor-in-Chief

The world economy has reached a precarious point. While many people believe that the worst might be behind us, just as many people see a jobless recovery with little growth. Unemployment has reached 10% in the U.S. and the American deficit continues to soar to record levels putting the U.S. dollar in jeopardy. The European economy has slowed to a stand still. Many countries, including the U.S., are facing difficult decisions as tax revenues dwindle. All of these uncertainties play right into the gold miner’s hand.

Investors always return to gold as a safe haven during difficult economic times. If 2010 is the year of the great recovery, then the prospects for gold might be diminished. There are some bearish sentiments toward gold. Improving stock markets usually dampen prospects for gold. Should the recession drag on for years, the demand for luxury items such as jewelry will surely decline. In fact, those items may become a source of cash during difficult times. What if more countries decide to pursue a weak-currency strategy to boost exports? The dollar might not fall as hard and as quickly as some expect.

Gold miners are an interesting lot though. During high times, they can usually refute every bearish argument. Mine supplies are flat and the number of new major gold finds is down significantly. They believe that investors have re-discovered gold and that this pricing cycle has legs. The thought of double-dip recessions and global monetary imbalances will just drive the price of gold higher.

The current economic situation obviously favors gold. Gold prices reached records levels of more than $1,200/oz during early December. They did pull back. They have, however, maintained a very respectable level of around $1,080/oz through most of January. Prices for natural gas and petroleum have remained relatively low. With the exception of South Africa, prices for electricity have also held steady. With cash costs that range anywhere from $300/oz to $600/oz, gold miners are seeing some excellent margins and they are flush with cash. The fact that they are trying to ramp up production at all of the major mines should come as no surprise.

Barrick Leads the Way

With 26 gold mines, a project pipeline that stretches across five continents and large land positions on some of the most prolific mineral districts, Barrick Gold is the gold industry leader. In its third quarter earnings report, Barrick said it was on track to produce 7.2-7.6 million oz of gold in 2009 at total cash costs of $450/oz-$475/oz or net cash costs of $360/oz to $385/oz.

The company’s North America region continued to perform well, producing 710,000 oz at total cash costs of $518/oz. These results were significantly driven by the Goldstrike mine, which produced 340,000 oz at total cash costs of $495/oz. Goldstrike remains Barrick’s largest gold producer. Its operations include the Betze-Post open-pit and the Meikle and Rodeo underground mines. Mining from the open-pit transitioned at the end of the quarter into a waste stripping phase which was expected to continue for the balance of 2009. In 2008, Goldstrike produced 1.71 million oz of gold at average total cash costs of $452/oz. Its proven and probable mineral reserves as of December 2008 were estimated at 12.8 million oz of gold.

Production at Cortez increased to 140,000 oz at total cash costs of $554/oz as a result of higher grades which are expected to continue during the fourth quarter. At a capital cost of $500 million, the Cortez Hills mine in Nevada is expected to start producing during the first quarter of 2010 at a rate of 1 million oz/y at a cash cost of $350/oz to$400/oz.

Barrick’s South America business unit produced 510,000 oz at total cash costs of $247/oz. In addition to being one of the largest greenfields gold discoveries in the last decade, Lagunas Norte is Barrick’s lowest cost operation. In 2008, the mine produced 1.2 million oz of gold at total cash costs of $125/oz. During the third quarter 2009, it produced 300,000 oz at total cash costs of $128/oz. Proven and probable mineral reserves as of December 2008 were estimated at 8.9 million oz of gold.

The company’s Australia Pacific region produced 460,000 oz at total cash costs of $585/oz. Porgera, the region’s largest operation, produced 120,000 oz at total cash costs of $583/oz. Higher production and lower total cash costs are expected at Porgera for the fourth quarter.

Production from the African business unit during the third quarter was 210,000 oz at total cash costs of $477/oz with a strong contribution from the new Buzwagi mine in Tanzania, which produced 87,000 oz at total cash costs of $315/oz. A flotation plant was commissioned during the third quarter and processing is expected to transition from oxide to sulphide ore in fourth quarter. Buzwagi is anticipated to produce about 200,000 oz of gold at total cash costs of about $335/oz in 2009.

For 2010, Barrick is projecting 7.7-8.1 million oz. The company has consistently grown reserves and resources during the last three years. In 2008, the company had 65 million oz measured and indicated resources, 34.8 million oz in inferred resources, and 138.5 million proven and probable reserves. This represents the industry’s largest reserve base by more than 53 million oz.

Newmont Plans to Grow 5%-10%

Newmont Mining is the largest primary gold producer based in the U.S. As of December 2008, the company had proven and probable gold reserves of 85 million equity oz of gold and an aggregate land position of more than 100,000 sq km.

Newmont’s Boddington operation in Western Australia achieved commercial production during November 2009. For the first five years, gold production will average approximately 1 million oz/y of gold at an average cost of about $300/oz. Mine life is estimated to be 24 years. The Boddington project experienced some start-up delays, which were attributed to contractors and weather. As a result, the company reduced its full year total gold production to 5.2 million oz gold(e); at the lower end of the 5.2-5.5 million oz range originally anticipated for 2009. Newmont also said it sees volume growth on the order of 5%-10% and costs to increase by 5% in 2010, despite the expected positive impact from the Boddington ramp-up.

A highwall failure at Batu Hijau will delay ore access in 2010 and 2011, but not impact the company’s 2009 production. Shortly after it had been granted a much needed land-use permit in September, the copper-gold mine in Indonesia announced a geotechnical failure in the west wall of its pit. The mine had been expected to produce 500 million lb of copper and 525,000 oz of gold this year prior to the wall failure.

At the Ahafo mine in Ghana higher throughput and plant availability were offset by lower than anticipated recoveries and grades as a result of changes in mine sequencing. Costs applicable to sales were slightly higher than expected due to the processing of higher cost stockpile material and higher royalty costs, partially offset by lower mining costs. The outlook for hydroelectric power availability continues to be positive.

In 2008, the Yanacocha mine in Peru (the largest gold mine in South America) completed the construction of a $230 million gold mill, which is enhancing the processing efficiency of more complex ores and expanding future reserves. Further exploration near the area is under way.

Newmont’s Nevada properties operate as an integrated unit and they use a wide variety of processing methods. The Carlin Trend is currently pursuing various phases of expansion to recover more ounces that could further extend mine life. Exploration at Midas continues to reveal new deposits that are expected to extend the mine’s life.

Production at Olimpiada Slows

Russia’s largest gold miner, Polyus Gold, produced 1,261,000 oz of gold in 2009, compared to 1,222,000 oz in 2008, showing a 3.2% year-on-year growth. The growth in production is primarily a result of the launch of the Titimukhta project in Krasnoyarsk region, as well as acquisition in the third quarter of 2009 of a controlling stake in KazakhGold Group Ltd., one of the leading gold producers in Kazakhstan.

In 2009, the Olimpiada mine produced 839,000 oz of gold, compared to 873,000 oz in 2008. Processing refractory sulphide ores along with ores from other regions, the Olimpiada mill ran into some difficulties, which required some “re-adjustments,” according to the company.

To mitigate these negative impacts, additional measures have been developed aimed at raising operating efficiency at the Olimpiada mine. In particular, additional blending was arranged at the mine, measures were taken to raise the mills’ efficiency, within a program designed for 2009-2010. As a result of those measures, technical parameters of the mills were improved at the end of 2009. The mills’ technological efficiency will continue to be improved, as long as the program continues.

Grasberg Transitions to Lower Grades

Through its subsidiary PT Freeport Indonesia, Freeort McMoRan Copper & Gold operates the world’s largest copper and gold mine in terms of reserves at its Grasberg operations in Papua, Indonesia. PT Freeport Indonesia reported lower copper sales and higher gold sales in the fourth quarter of 2009, compared to the fourth quarter of 2008 as a result of mining of a section with anticipated lower copper ore grades and higher gold ore grades in the Grasberg open-pit mine.

Freeport expects Indonesia sales of 1.2 billion lb of copper and 1.7 million oz of gold for the year 2010, compared with 1.4 billion lb of copper and 2.5 million oz of gold for 2009 as Grasberg transitions to a lower grade section of the open-pit mine in 2010. Anticipated changes in ore grades throughout the year are expected to result in variability in quarterly volumes. Approxi-
mately 60% of PT Freeport Indonesia’s copper and gold production is expected in the second half of 2010.

AngloGold Ashanti Reports Fewer Safety Problems

AngloGold Ashanti reported increased production as a result of continued improvements at its Geita mine in Tanzania and fewer safety related interruptions at its Vaal River operations in South Africa. Pro-
duction rose 5% to 1.187 million oz in the third quarter. Total cash costs were $534/oz, despite the impact of higher wages and power prices in South Africa and stronger operating currencies.

During the third quarter, AngloGold Ashanti invested $797 million to complete a restructuring of its hedge book at prices significantly below current market prices. The company now has hedge commitments of 4.3 million oz, less than a year’s production. It anticipates a decline in this position of 800,000 oz/y between next year and 2015, when it will be hedge free.

Geita continued its recovery under its new management team, delivering a 32% rise in production to 83,000 oz for third quarter. The Vaal River mines increased output by 20%.

AngloGold Ashanti’s wholly-owned Brazilian operations delivered a 23% increase in production to 90,000 oz and, despite the stronger currency, are now the lowest-cost assets in the group with cash costs of $333/oz. Cerro Vanguardia, in Argentina, is the next best performer with production of 47,000 oz at cash cost of $336/oz.

Four members of AngloGold Ashanti’s South African workforce tragically lost their lives during the quarter. According to the company, intensive effort remains ongoing at all levels of the organization to eliminate workplace injuries.

AngloGold Ashanti suspended underground operations at the TauTona operation to conduct an inspection of the steelwork along the mine’s shaft system, a task that will potentially take two months through to the end of 2009. The decision was a pre-emptive safety measure following an incident where a length of steel dislodged and fell down the shaft.

To reflect these ongoing safety efforts and the associated production impact, AngloGold’s production outlook for this year is now around 4.55 million to 4.6 million oz. Total cash costs for the year are expected to be between $515/oz and $530/oz, assuming an average exchange rate of between R7.00 and R7.50 per dollar during the fourth quarter. Production in the fourth quarter is estimated at 1.16 million oz at a total cash cost of $590/oz, assuming an exchange rate of R7.50 per dollar.

Gold Fields Deals with Production Stoppages

Gold Fields is one of the world’s largest unhedged producers of gold with attributable production of 3.6 million oz/y from nine mines in South Africa, Ghana, Australia and Peru. Gold Fields has reserves of 81 million oz and resources of 271 million oz.

Attributable production for the fourth quarter is expected to be approximately 900,000 oz, which is 2.8% lower than expected. The lower production is mainly a result of seismic related production stoppages experienced in South Africa. At the Driefontein mine in particular, seven days of production, or almost one third of the December production month, were lost due to a major seismic event which resulted in an extended search and rescue operation. In line with the lower production, total cash costs are expected to be approximately $615/oz, which is approximately 4% and 3% higher than expected.

In its third quarter earnings report, Gold Fields reported quarterly production figures of 527,000 oz for its South Africa region. The Driefontein mine produced 190,000 oz; Kloof produced 161,000 oz; Beatrix produced 111,000 oz; and South Deep produced 65,000 oz. While South Deep continued to build up toward its ultimate target of 300,000 oz/y, both Driefontein and Kloof had a difficult quarter mainly as a result of safety related stoppages.

Quarterly production from the West Africa region increased marginally to 226,000 oz. Tarkwa produced approximately 175,000 oz; and Damang produced approximately 51,000 oz. Tarkwa’s expanded CIL plant reported a record month in August during which it exceeded its name plate capacity of 1 million mt milled per month, and is now performing consistently at name plate capacity level.
Goldcorp Delivers Record 2009 Production

Goldcorp recently announced record gold production for 2009 of more than 2.4 million oz. Fourth quarter 2009 gold production totaled 601,000 oz. Total cash costs are expected to be approximately $295/oz of gold on a by-product basis and approximately $390/oz of gold on a co-product basis, beating guidance on both measures.

The company’s Peñasquito in Mexico recently began production. Ore processing throughput rates for the first sulphide processing line (Line 1) are now at operational production levels while the company reports “excellent” progress continues to be made toward completion and ramp-up of the second sulphide processing line (Line 2) in the third quarter of 2010.

In 2010, Goldcorp expects to produce approximately 2.6 million oz of gold at a total cash cost of approximately $350/oz on a by-product basis and $450/oz on a co-product basis.

At the Red Lake mine in Canada, the focus in 2010 will be increasing mill throughput toward available capacity. This initiative is expected to lead to a strong increase in gold production at the world’s richest gold mine.

The Los Filos mine is expected to remain the largest gold producer in Mexico in 2010. The mine will be an important driver of Goldcorp’s growth as commissioning of a crushing and agglomeration plant takes place during the first quarter of 2010. A production decrease is forecast at El Sauzal as the mine nears the end of its life.

Newcrest Implements Cost Reduction Programs
Newcrest operates three surface mines and four underground mines. As of June 2009, Newcrest’s gold resources stood at 80 million oz with 42 million oz of reserves. Most of those reserves are contained at the company’s Cadia Valley mine (55%) and the Telfer mine (33%). Cadia Valley has 44 million oz of resources and 8 million mt of copper.

Cost reduction programs have reduced Telfer’s cash costs to the midpoint of the global gold industry. Costs have declined from A$908/oz in December 2008 to A$599/oz in June 2009. The program included reducing on-site labor, a power station operating strategy, improved maintenance profile, and reduced consumable consumption. The company will continue the cost reduction program in 2010. The company describes Telfer as re-emerging with a brownfields exploration focus in 2010.

A similar cost reduction program at the company’s Gosowong mine has reduced cash costs from A$440/oz in December 2008 to A$314/0z in June 2009. New-
crest modified the mining method, centralized administration, and launched an ongoing mine and mill optimization program. In 2010, the company expects to see further costs reductions as it takes over mining operations and continues with optimization programs.

Kinross Reports Record Quarterly Production

Kinross delivered its highest-ever quarterly output in the fourth quarter of 2009, and expects to produce a record 2.23 million gold equivalent ounces for the full-year 2009, a 21% increase over 2008. The company’s new mines at Kupol and Kettle River-Buckhorn both delivered production on plan for their first full year of operation.

For 2010, production is expected to be consistent with 2009 levels, with a slight increase in cost of sales per ounce, as grades are expected to decline at Kupol, while performance and production at Paracatu are expected to improve, and the new Fort Knox heap leach is expected to contribute a full year of production.

At the Paracatu expansion, improvements and fine-tuning in the fourth quarter of 2009 have stabilized plant operation and increased recovery to an average of 77%, near the plant design recovery rate of 80%, which resulted in fourth quarter gold equivalent production of approximately 108,000 ounces, slightly higher than previously estimated. The company has now approved plans to install a third ball mill at the Paracatu expansion to increase the grinding capacity needed to process harder ore from the Paracatu orebody. Delivery of the new 15 MW ball mill is expected in mid-2010, and installation and commissioning are expected to be complete in the first half of 2011. The total capital cost is estimated to be approximately $97 million, of which approximately $90 million will be required in 2010.

At the new Fort Knox heap leach, some 3.7 million mt of ore had been stacked as of the end of the fourth quarter, and leaching was progressing well, with production of approximately 7,400 oz gold(e) from the leach pads in the fourth quarter.

At Kupol, ground control issues encountered in the third quarter of 2009 have been addressed with a modified mine plan. Modifications include shortening stopes, restricting air circulation in non-operating areas to maintain permafrost conditions, enhanced rock control procedures, and modified sequencing. Forecast production for 2010 based on the modified mine plan is generally consistent with the original mine plan, with a slight increase expected in cost of sales per gold equivalent ounce.

Lihir Joins the Ranks of Million Ouncers

Lihir Gold Ltd. delivered its fourth successive year of record gold production in 2009, with output exceeding 1 million oz for the first time in the company’s history. Production for the year totaled 1.12 million oz, up 27% on the prior 12 months and in line with market guidance. Output rose to 278,000 oz in the final quarter, an increase of 19% over the preceding three month period.

The group maintained its track record as one of the world’s low cost producers with total cash costs for the year of $397/oz. Fourth quarter total cash costs were $454/oz, down from $487/oz in the September quarter. In 2010, output from Lihir Gold’s three producing operations is expected to be in the range of 960,000 oz to 1.06 million oz. Group production is forecast to rise to 1.3 million ounces in 2012 as expansion projects lift output at Lihir Island and Bonikro.

Lihir’s production growth in 2009 was due to a combination of record output at the cornerstone Lihir Island operation, together with a full 12-month production contribution from the Bonikro and Mt Rawdon mines acquired in mid-2008. Full year production at Lihir Island totaled a record 853,000 oz in 2009, up from 771,000 oz in 2008 and well in excess of the 770,000 to 840,000 oz forecast for the year. The Million Ounce Plant Upgrade progressed into construction in 2009, with the project on track to lift gold production at Lihir to an average of one million ounces from 2012.

In Côte d’Ivoire, the Bonikro mine produced 150,000 oz in its first full year of production, within the guidance range of 130,000 to160,000 oz. Strong progress was made in the feasibility study examining the potential to develop new deposits at Hiré, approximately 10 km from Bonikro, and regional exploration activities continued to generate encouraging results. At Mt Rawdon, in Queensland, gold production reached 108,000 oz, above the 90,000 to 100,000 oz forecast for the year.

In 2010 Lihir has forecast production at Lihir Island of between 770,000 to 840,000 oz, approximately 110,000 – 130,000 oz from Bonikro and 80,000 to 90,000 oz from Mt Rawdon. Total cash costs are forecast to be below $450/oz.

The author would like to thank the Denver Gold Group. Information for this article was gathered primarily from the group’s Denver Gold Forum held during September 2009, and updated with individual earnings reports.