Declining costs of production, a historically high gold price and dropping exchange rate are aligning to give Australian gold juniors a leg up in a persistently tough capital market, Kalgoorlie gold miner Phoenix Gold’s managing director Jon Price said.
 
Price, whose company has now grown its total resources in the West Australian goldfields to 3.8 million ounces of contained gold, said Australia will become a “very attractive destination” due to several factors in its favour, especially in the gold space.
 
“Australia’s costs of production are declining,” he told MiningnewsPremium’s sister publication RESOURCESTOCKS.
 
“We see it quarter-on-quarter: everyone who understands that are addressing their costs of production. So we are coming in on the back of a lower production cost curve.
 
“The gold price is bouncing around all over the place, but in terms of an Australian-dollar gold price, we have a competitive advantage in this country. We see the exchange rate dropping [against the US dollar] and we see the US-dollar gold prices bottomed out.
 
“So if we can maintain a $A1400-1500/oz gold price, on the back of a corrected cost curve which we had to address because we’re all getting to fat in the pasture, all of a sudden those margins are getting bigger and bigger.
 
“That’s why Australia will become a very attractive destination – that’s why we chose it.”
 
Price also had a reality check for for those who say that the WA Goldfields is “done, tired and mature”.
 
He believes there’s plenty of life there yet, which augurs well when factoring in a “corrected” cost curve which should occur if miners are savvy about their own industry’s future.
 
“Just come in and have a look at what’s being found,” he said. “We are 30 minutes out of Kalgoorlie and we have nearly 4 million ounces of resource; Tropicana is there; and new small, medium and large size discoveries are being found.
 
“So there is a lot left in the Goldfields yet, and with a corrected cost curve which we had to fix and a higher gold price which is still, in historic terms, at record highs, if you can’t make a $300-400/oz margin, then you’re doing something wrong.”
 
Not surprisingly, Price is a self-declared gold bull, especially when it’s evident the world is not out of its financial dramas yet.
 
“[The world] thinks it might be; it isn’t, and people will return to gold. Gold prices will climb and I think, over time, the Australian dollar will drop to that 85-90% (to the US dollar). You have a slightly higher US price and a slightly lower exchange rate: getting that double whammy, it’s extremely good.
 
“At $A1500/oz gold price, that’s a very, very nice prize. If we can’t be running $1000/oz all-in sustaining costs or less then we’ve got to keep working on our cost base until we can, and that’s where everyone has to re-calibrate their expectations – from salaries to contractors to service providers – because our industry needs them to.”
 
Phoenix is practicing what Price is preaching, having recently approved a staged development plan of its gold assets in Western Australia following a successful definitive feasibility study, which outlined all-in sustaining cash costs of $A989/ounce.
 
This is all in stark contrast to bank analysts’ bearish outlook which appears to be taking on something of a sport for them. This week, Morgan Stanley analysts were the latest to come out with an average price prediction of $US1168/oz for H2 2014 and $1138/oz for next year.
 
This follows Goldman Sachs analysts’ “slam dunk sell” advice offered last October for this year. Goldman proffered that gold could fall to $1050/oz in the next 12 months as the US Federal Reserve continues its tapering policy through the year.
 
ABN Amro analysts added to the painful predictions, saying gold may end 2014 at $1000/oz.
 
But Price doesn’t see it that way. He says that a geographical shift in physical gold buying leads him to the conclusion that gold is “on the move” – in a more positive direction.
 
Reflecting on Tice Capital principal David Tice’s comments at Mines and Money Hong Kong in March regarding the folly of the US’ fiat currency which seems eerily similar to ancient Rome’s retrospectively ludicrous attempt at devaluing its own Denarius, Price suggested that there is not enough physical gold backing in exchange-traded funds (ETFs).
 
“So all of a sudden there is a fundamental supply and demand scenario: Asia is burgeoning, India has always typically been a mass importer and buyer of gold; China is doing more of it,” Price said.
 
“Asians love their gold and they love to have that as a measure of their status and wealth – and that’s just going to continue.
 
“So you have currency and fiscal factors, you have supply and demand, and a geographical shift in buying. All that leads to the conclusion that gold is going to move.
 
“We can only do what we can control, which is making sure we address costs. We have to look after our shareholders, which I don’t think we [as an industry] have been. Where are the returns to them? Everyone seems to get a piece of the pie except for those who have invested in [mining stocks].”
 
This line of thinking was enunciated with brutal clarity at Mines and Money Hong Kong by Baker Steel Capital Managers managing partner David Baker. While miners pursue bank financing to avoid diluting shareholders to maximise their returns and minimise risk, Baker said it inevitably meant risk was being transferred to shareholders while returns were transferred to the banks.
 
Price, a shareholder himself, re-iterated that miners need to bring shareholders into the picture in their decision-making, and even juniors not yet in production can reassure investors they’re on the right track, especially in a capital-constrained environment.
 
“Even from a mine design and optimisation standpoint, where is the shareholder piece? I think that’s the important message that investors in the market need to have, because why invest? Why not go invest in banks, infrastructure or IT? Where are the returns? Royalty companies and even state governments get their shares, but not shareholders,” Price said.
 
“I do like these production linked returns to shareholders. I like what Jake Klein from Evolution Mining has done, with a production revenue-based dividend. More companies need to look after long and suffering shareholders.
 
“Juniors can’t throw dividends out if they’re not cash-generating, but they can certainly signal intent that this should be a part of their thinking and model going forward, and good companies are.”