It is a debate which has dogged the gold industry over the years and in the good times of robust gold prices, the soft target of an increased royalty regime becomes very attractive to those populating Parliament House in West Perth. 

And it is a discussion that will not go away. Coalition Treasurer Mike Nahan is on the record as saying that the gold royalty rate would not rise while he remained in office. Labor, in November 2015, said it too would not tamper with the rate.

But, as the saying goes, “a week is a long time in politics” and so it remains incumbent upon the advocacy watchdogs to keep their teeth sharpened.

Gold Fields is the largest gold producer within the ranks of the Gold Industry Group, whose members include Doray Minerals, Norton Gold Fields, Ramelius Resources, Gold Road Resources, ABC Refinery and the Kalgoorlie-Boulder Chamber of Commerce and Industry. Towards the end of 2015, the Perth Mint also came on board.

Gold Fields Australasian chief Richard Weston is a strong supporter of the Group: “We were very keen to be involved. We were very concerned that a royalty increase would have a significant impact on our mine economics.”

With the acquisition of assets from Barrick two years ago, Gold Fields technically has five mines in Australia, but Agnew and Lawlers are treated as one. The other three are St Ives, Darlot and Granny Smith.

Between them, they produced more than a million ounces of gold, or 46% of the company’s total output, in 2014.

“Any increase in the royalty – when you are looking at a million ounces – is quite substantial. We don’t think a royalty increase will be introduced before the Western Australian election,” which is scheduled for March 2017.

“And I don’t think it would be appropriate at this stage, in the light of the way the mining industry in WA is heading, for the government to consider increasing it. I would think that the probability of it is low,” said Weston, whose designation is executive vice president, Australasian region.

The rate that is currently paid is 2.5% and there were rumblings of it being increased to between 3.25% and 3.5%.

“That would effectively be about a 30% increase in the royalty,” Weston said.

Gold Fields is investing serious dollars for a long-term future in WA. Almost the entire Gold Fields exploration budget for the year ahead, about $90 million, has been allocated to exploration in Australia. “We basically do brownfields exploration adjacent to our current mines and broader greenfields on our extensive tenements in Western Australia. Internationally, Gold Fields does have an exciting exploration project called Salares Norte in northern Chile, which has development potential.”

On the face of it, none of Gold Fields’ Australian operations have long lives left. But as Weston points out, it is rare for a good majority of West Australian gold mines to have much more than two or three years of reserves at any given time.

“Agnew and Lawlers have been going for 20-plus years and have never had more than two or three years of reserves ahead of them. The same applies to Darlot. When we bought it, it had just six months of reserves – and we have now operated it for two years.”

Weston said that Gold Fields was, initially, “not keen” on Granny Smith but once the ruler had been run over it, it became much more attractive.

“Granny Smith has turned out to be our crown jewel. We will have paid for it, and the other two Barrick mines, by the end of the year, just a little over a two-year payback period for all three of them.

“But while Granny Smith has been the star performer, Darlot has been consistent and gave us better than breakeven in the first year. It has been a little bit behind this year, but should give good results by year-end.”

Weston had equal praise for the performance of the owner-mining operation at Lawlers and the contractor operation at the contiguous Agnew. He adds that Gold Fields does not have a set model for either contracted or owner-mining operations; how it is run is decided by whatever is best for the individual mine “and which gives us the best return”.

Weston considers the St Ives mine, near Kambalda, as one of the more complex mining operations in Australia.

“We have been working on making St Ives operations simpler and more efficient and we will be down to one underground mine and two open pits by end of this year producing at a rate of 3.2 million tonnes per annum, far below its rated 4.8Mtpa capacity.

“We are spending a lot of money to delineate further reserves, and we are making good money at St Ives at the moment on this lower production. Granny Smith meets all its production requirements and it is still on campaign milling.”

Gold Fields is in the enviable position of having spare milling capacity, but because mills run optimally when they are full, the company has embarked on identifying other sources of ore that might be available to supplement feed into St Ives, Granny Smith and Darlot.

Weston said that sourcing the additional ore had not yet delivered any suitable sources so far but this was not for lack of effort on the part of Gold Fields, but more about the state in which gold producers currently found themselves.

He said that at the recent Denver Gold Forum, it was noted that of 130 listed gold companies, the share price variation for 100 was negative and 30 were positive. And of the 30 positive, nine of them were Australian companies. “This indicated that the weakening Australian dollar had been driving interest in the gold industry, due to the increasing Australian gold price. We were predicting that the exchange rate might drop to about 65c. We were not seeing that in the past couple of months but we may see it over the next few months and if the US gold price could remain at about $1150 at a 65c exchange rate, we could almost be $1770 as an Australian gold price.

“It will push the Australian gold equities up higher, and make it harder to do an acquisition or to try to buy supplementary ore for the process plant. It is going to be much harder and more expensive,” said Weston.

Weston adds that this has galvanised exploration efforts in the shadow of the headframe. “If we can find more ore on our own tenements, if we don’t have to buy it externally, if we can get new mines into operation and supply additional ore then that’s where we get the full benefit. This is especially the case in this high Australian dollar gold price environment. And we have been in this business long enough to know that it won’t stay good forever.”

Gold Fields has the added incentive to make hay while the sun shines because it does not hedge its production.