Has Australia’s Mining Boom Become Your Personal Disaster?

Yesterday we promised to try and figure out the Australian dollar's behaviour using the Grattan Institute's new report on the mining boom. Analyst Jim Minifie's work isn't a bad read because it has lots of pictures. His key points are that Australia can transition quite well into and out of a mining boom, but we've failed to make the most of our latest one.

First of all, it's the size of the boom you need to understand. Minifie calculated that the mining industry provides 'nearly a fifth of all production in Australia' and'mining's direct share of GDP more than doubled in the past decade, to 11 per cent.' (Not all GDP is 'production'.)

This chart shows how, even in nominal terms, Australia's mining investment has dominated globally.

The question is where all that money came from. Much of it was from overseas, explaining the Aussie dollar's surge to $1.10 USD. And so, as the mining investment boom slows, that has implications for the currency, not just the economy.

So why does Minifie disagree with all the media shenanigans about the mining boom giving us resource curse? He points out that Australia is extremely good at handling the comings and goings of the commodity cycle. This chart shows how, despite having resources contributing to much of GDP (bottom axis), Australia's output and income volatility is low (y axes).



Noting that OECD countries tend to have lower volatility, this chart basically says that Australia has the stability of a developed nation despite a volatile resource industry. The best of both worlds.

To understand this stability, you've got to know what's been going on in the rest of the economy while all this mining boom business has been dominating. Three important things.

This chart shows how prices in non-tradeables have boomed many times more than in tradeables, which includes resources. In other words, what Aussies have to buy from here at home has become expensive at a much faster rate than what they export. Australians are 'price takers' when it comes to buying non-tradeables and selling tradeables. They've been slogged on the difference between the two.

That's why so many people feel like the mining boom has been a disaster for them personally. Not everyone got a job driving trucks, but everyone did have to put up with a soaring cost of living.

What Minifie focused on in the report was the failure of Australia to capitalise on the profits of the boom. Strangely enough, he considers disappointing tax revenue to be a measure of this failure. In our book, you starve the beast, not fund it.

But in a politician's world, the gap between revenue and spending doesn't matter so much. So, even if you've got a soaring mining boom on, there's no reason to worry about saving for a rainy day. That's why Australia's government debt has been soaring when it's supposed to be falling. For now, that's goosed GDP to the upside. At some point' we'll have to pay the debt back though.

The real revelation out of the Grattan Institute's report has nothing to do with mining and came from this chart:



Stuff mining, what on earth is going on in the professional, financial and admin services industry? It's 20% of our economy and growing rapidly.

What kind of economy runs on financial services? They're supposed to enable other parts of the economy to function, not become the economy itself.

If you're looking for a bubble or economic strife, it's not mining you have to worry about. It's financial services. A banking crisis could sink Australia's economy far more than a slowdown in mining.

Speaking of sinking, what do you get when you throw 28 cats into a bag and shake it? The European Union.

You just gotta love these guys and the spats they get into. The latest one is just brilliant. The Brits, proud of their austerity efforts (in terms of rhetoric anyway), have gone and annoyed the Spanish by having a successful economy. So the Spanish want to stick a border tax of 50 euro on crossing into Gibraltar.

If you can't tax your own flailing economy, tax somebody else's. The Spanish also want to close their airspace to anyone flying into the British outcrop. They already fired upon a British jet ski a few months ago in a border dispute.

It won't be long before the English hoist this onto their border posts as a reminder of what happened to the Spanish Armada the last time it tried to get in the way of the English at the battle of Trafalgar:

AngloGold Ashanti to cut 2,000 management jobs

South Africa's AngloGold Ashanti plans to cut about 2,000 management jobs, or about 40 percent of its management positions, to reduce costs, its chief executive said on Wednesday.

Srinivasan Venkatakrishnan told a media conference the job cuts are part of a larger plan aimed at saving the company as much as $482 million next year.

Read more: AngloGold fastens cost seatbelt ahead of further price turbulence

AngloGold Ashanti has suspended its dividend and plans to slash exploration and corporate costs as it prepares for to wait out the low gold price environment.

Speaking to journalists ahead of the group's Q2 results presentation in Johannesburg, CEO, Srinivasan Venkatakrishnan (Venkat) explained that, while the group is positive about gold prices over the long run, in the short to medium term the group expects a lot of turbulence in the price of the yellow metal.

"It is best to be prepared for a low gold price environment so you are better positioned to tackle an upside in the gold price," he said. In order to do this, the group is using a gold price of $1,100 as its base case for planning and is focusing sharply on both costs and revenues.

As Venkat explains, “Our revenue enhancement efforts are focused on stripping out unprofitable production and bringing our Tropicana and Kibali projects to production in the coming months. These two important new mines are expected to contribute approximately 550,000oz to 600,000oz of new annual production next year at below our current average cost, improving the group’s cash cost profile.

On the cost side, the group has already initiated its previously announced Project 500 initiative which it says aims to remove rouhgly $500m from the group's operating cost line within the next 18 months.

"This approach has been piloted at four global sites (Siguiri – Guinea, Geita –Tanzania, Moab Khotsong – South Africa and Cuiabá – Brazil), which were selected on the basis of being among the largestlong-term producers in the company. Project 500 was well received by the site management teams and potential savings ofapproximately $235m have been identified. Detailed planning to realise those opportunities and ensure they are integrated intobudgets, is currently underway," the group noted.

At the corporate level, AngloGold has also begun streamlining its headoffice costs with the aim of removing as many as 2000 positions.

"We expect that during the last quarter of this year, after taking into account the notice periods that need to be provided to affected employees, approximately 35-40% of these roles will have been removed. Indirect spend, such as travel, communication and IT costs are being rationalised with a view to further sustainable cost savings," it says.

As a result, the group expects corporate costs are anticipated to fall from the $240m forecast for this year, to between $120m and $140m in 2014.

According to Venkat, the reduction of the group's executive team from 13 to 10, while only a 25% reduction in employment terms, from a total cost to company point of view, it will reduce their contribution by between 35% and 40%.

AngloGold's capital bill for the year is expected to come in at roughly $2.1bn, Venkat explained but, added that around $1bn of that is big project capital that will start to taper off next year.

The other cost pillar AngloGold is paring down considerably is its exploration arm. The group has reduced its exploration focus to just three areas, Colombia, Australia and Guinea and, as a result has withdrawn from 13 other jurisdictions.

For the rest of 2013, the group expects to spend $327m, compared to the previous guidance of $377m. And, in 2014, it plans to reduce this spend even further to between $150 and $175m.

According to Venkat, the decision focuses the group's exploration efforts on brownfields operations, which are expected to account for its new ounces in the medium term as well as areas where the group already has a foothold.

"We are looking to suspend speculative exploration, where the goal is the discovery of the world's ext gold belt. The junior explorers are also struggling for financing in this market so, to put in money in order to trade that market doesn't make logical sense in the current environment."

According to the gold miner, the total targeted annual savings from these exploration and corporate cost initiatives is expected to be between $437m to $482m next year, as compared to 2012 levels, or more than $100/oz."

The group also announced it will return to a bi-annual dividend schedule given the current market conditions and has elected to pass on the current quarterly dividend.

AngloGold was clear to point out that the next two quarters are likely to remain tough as the cost saving measures bed down and Kibali and Tropicana are yet to contribute fully. But, Venkat says, 2014 will be better.

The group expects all in sustaining costs to come in at around $1,200/oz for the full year 2013 but, for the quarter these costs are closer to $1,300/oz. However, Venkat says, for 2014, that number should come down by around $200/oz as revenues from Kibali and Tropicana ramp up and the cost savings filter through.

Financials

For the quarter, the group produced 935,000oz, 4% from the first quarter, at a total cash cost of $898/oz,

Headline earnings fell to $112m for the quarter, from $259m in the previous quarter, while at an adjusted level the group reported a loss of $135m for the quarter, compared to a $113m profit in Q1. "This figure includes a $144m loss associated with stockpile inventory write-downs, indirect tax provisions and corporate restructuring," the group said.

"Net loss attributable to equity shareholders for the second quarter of 2013 was $2,165m, compared to a profit of $239m in the previous quarter, negatively impacted by a post-tax impairment of tangible and intangible assets and investments and inventory write-downs aggregating $2.4bn."

Botswana Diamonds to revisit Orapa diamond licence

Aim-listed Botswana Diamonds has reached an agreement with privately owned Eversharp Investments to operate and jointly own the 2.9 km2 PL 117/2011 diamond mining licence, in Botswana’s Orapa region.

Botswana Diamonds said on Wednesday that it could earn up to a 51% interest in the joint venture company Newco, which would own the licence, by spending up to $300 000 over three years.

Chairperson John Teeling said that Botswana Diamonds had, over the past two years, analysed all available geochemical and geophysical data on the Orapa region. It had identified a series of focused targets, one of which was on the Newco block that contained AK10, a diamondiferous kimberlite, which Botswana Diamonds’ predecessor, African Diamonds, discovered in 2004.

Although extensive drilling of AK10 by African Diamonds did not reveal a commercial deposit, a recent review of data suggested that the area was worth revisiting.

“We are now using new technology and new eyes to look at the licence. This is a very prospective area," Teeling noted.

Detailed work on the block would start in the coming weeks and would involve groundwork to identify the best location to drill the target, followed by drilling.

The Orapa region was known to be highly prospective for diamonds, containing several producing diamond mines and diamond development projects.

Last week, Botswana Diamonds entered into an agreement with Siseko Minerals to earn a 51% stake in the Brightstone block in the Gope region, where Gem Diamonds is developing the Ghagoo mine and Petra Diamonds made a discovery on block KX36.

Barrick Gold setting its house in order. Lessons to be learnt

On the face of things Barrick Gold’s Q2 and H1 report looked pretty disastrous – write downs totalling over $8 billion, dividend cut by 75%, long term gold production targets deemed at risk, head office staff cut 30%.

But, in terms of a company setting its house in order perhaps they should be looked at in a very different light.  New CEO Jamie Sokalsky certainly seems to be taking the bull by the horns and if the stated remedies the company is taking are adhered to and achieved Barrick will retain its position as a highly profitable and efficient miner of gold even at current prices or, heaven forbid, even lower ones.

There have to be lessons learnt here for other gold mining companies trying to recover from the first half’s dire financial results following the decline in the gold price, as well as miners in other sectors where commodity prices have disappointed.  Talk about focussing the mind!

For a more detailed look at the specifics of Barrick’s quarterly and half year figures click on: Barrick announces $8.56B loss, excellent operational quarter

How will the company achieve a recovery?  The idea seems to be to divest itself of, suspend or close down, most or all of its higher cost operations regardless of the impact this will have on production, as well as implementing much tighter cost and capital controls on existing mines and projects. Hence the vulnerability in the long term gold output forecast.  In a statement the company noted that “For the remaining operations with expected 2013 AISC [All In Sustaining Costs] above $1,000 per ounce, we will either change mine plans, suspend, close or divest these assets to improve cash flow.”  There followed a list of specific measures which the company is taking to improve the bottom line covering some of its specific operations.  Around a quarter of Barrick’s gold mines fall into the plus $1,000 AISC bracket, including most of the company’s Australasian and African mines.  Some can be made profitable through better grade controls and by shutting uneconomic sections and reworking the mining plan, but others may be beyond redemption at current gold prices for a major miner with relatively large corporate overheads to be taken into account.

Not mentioned specifically, but perhaps indirectly, in the company’s plans was African Barrick Gold, the company’s big African gold mining arm in which it still holds 74%.  As Mineweb readers will recall, plans were well under way last year to sell off African Barrick to China National Gold Group Corporation, but negotiations fell apart a little over 6 months ago after the Chinese due diligence highlighted more of the African operations’ shortcomings than they were happy to assume – shortcomings which had become very apparent from African Barrick’s own reporting. 

African Barrick’s current three producing mines (a fourth was closed in March) are operating at nearly 50% in excess of the parent company’s $1,000 AISC target which suggests that Barrick is still looking for buyers, but in order to make the operations attractive as a whole it is going to need to continue, and make a success of, the current ongoing production review to bring costs down.  Costs have already fallen quite sharply after the closure of a fourth mine, but yet more will still need to be done to make the operations in any way attractive to a third party buyer.

See: Much better Q2 for African Barrick Gold, but....   for a more detailed picture of African Barrick’s latest results.

Indeed the same applies to virtually all of those Barrick mines which may be on the auctioneer’s block.  To make them attractive to potential buyers at a price Barrick will deem appropriate they are going to have to be seen to at least have the potential for improvement. 

No-one is going to want to pick up heavy lossmakers unless they feel that, perhaps, a smaller, more flexible approach to mine operations might cure the problems and bring them into profit.  On a mine by mine basis, cash cost reporting may actually mean something in this respect, particularly to a company with low corporate overheads.

All these moves will take time to bring to fruition.  Even so it is notable that Barrick’s Q2 costs were already beginning to come down significantly as a result of the initial implementation, a fact noted by the markets which marked Barrick shares up on the quarterly announcement despite the horrendous looking headline figures although it subsequently fell back to make a small loss on the day due to a rising dollar and falling gold price that day.

Barrick’s peers among the world’s top gold miners will be undertaking similar measures, although they may not have detailed what they are planning quite so precisely, and perhaps are reluctant to take some of the drastic medicine Barrick is proposing. 

Certainly virtually all are writing down values of existing and future operations in their books, reviewing and curtailing capital investment programmes, cutting exploration and there is a renewed emphasis on bringing unit costs down too.  To an extent this can partly be achieved by mining higher grades, which most will be doing where they have this option, although this also means that overall production may not actually fall significantly despite closures and cutbacks in forward production plans..

Barrick does have a particular problem overhanging it though – Pascua Lama.  The latest cost estimate to bring the mine on stream is somewhere around $8.5 billion of which perhaps 60% has already been spent, but further delays and deferments and adjustments to the mine plan on both sides of the Chile/Argentina border, which the project straddles, will undoubtedly add to capital costs here. 

See: Top 10 gold miners face 2013 earnings nightmare

Indeed the latest deferral of start up there is part of the reason Barrick says it may now well not meet its original target of producing 8 million ounces of gold a year by 2016 – although this year’s guidance of 7-7.4 million ounces is being held and cost guidance is being reduced from its earlier $1,000 to $1,100 per ounce to the new level of $900 to $975 per ounce – a pretty rapid fall, although, again, some of this will probably have been achieved by running higher grades through the various mine plants and closing down less payable sections at its poorer performing mines.

Barrick does have a long term debt overhang and, as noted above, Pascua Lama remains a drag on finances, but too much has probably been spent there to consider shutting it down at this stage – although some have questioned whether the mine will ever come on stream given some of the environmental opposition on both sides of the border.  It’s probably a problem Sokalsky would rather not have inherited – but if it does eventually come on stream it should meet Barrick’s criteria on the cost front.

Of course if Barrick is successful in bringing costs down in its operational reviews of its poorly performing mines, and implementation of the new measures it comes up with, then perhaps it won’t actually need to sell them off.  However it is also possible it may be trying to concentrate operations geographically into the Americas and would sell off its African and Australasian operations regardless.

This kind of dilemma will be facing mining companies of all kinds – not just the gold miners.  There has been a huge spate of CEO changes at major companies given the big fall offs in profits, and corresponding write downs of assets due to what is now seen in hindsight as poor decision making when prices were high and the miners could seemingly do no wrong.

iPad Version: Picture - Gold bars are pictured at the Ginza Tanaka store during a photo opportunity in Tokyo: REUTERS/Yuriko Nakao

Illegal Sand Mining: Row over Durga Shakti intensifies between UP government, Centre

NEW DELHI: Confrontation between the Centre and UP government over Durga Shakti Nagpal intensified with SP on Monday threatening to seek withdrawal of all IASofficers from the state after the Union government suggested that it could step in if the suspended official writes to it directly.

Prime Minister Manmohan Singh said, "We are in touch with the state government to find out the full details of the issue."

He told reporters in Parliament complex that the laid down rules to deal with such cases will be followed.

Minister of State for Personnel V Narayanasamy said that under the rules, the officer who has been suspended has the right to appeal.

"She has not approached us so far. But if she sends her appeal to us, we will send its copy to the state government and seek its response. Then, we will decide the future course of action. Normally, an officer approaches the state government... We cannot act suo motu," he said.

Reacting sharply, Samajwadi Party leader Ram Gopal Yadav said, "Uttar Pradesh would say that we do not want any IAS officer. Let the Centre withdraw all these officers from the state and it would run the state with its own officers."

The Centre had yesterday asked the UP government to immediately give a report on the suspension of Nagpal, a 2010 batch IAS officer who had cracked down on sand mafia in Gautam Budh Nagar area (Noida).

Narayanasamy had said yesterday this was the third such letter sent to the state government so far after 28-year-old Nagpal was suspended on July 27.

The Centre's fresh reminder came in the backdrop of Sonia Gandhi, who is Chairperson of National Advisory Council (NAC), writing a letter to the Prime Minister, saying that Nagpal should not be "unfairly treated".

"We must ensure that the officer is not unfairly treated," Gandhi had said in her letter to Singh, who holds the charge of Personnel Ministry.

The UP government had yesterday served a charge sheet to the IAS officer.

ArcelorMittal SA posts H1 loss, outlook bleak

ArcelorMittal South Africa, a unit of the world's top steelmaker, reported a first-half profit loss as sales weakened and production dipped, and it said it expected the bleak outlook to continue.

Africa's biggest producer of steel, posted a diluted headline loss of 31 cents per share for the six months to end-June compared with 26 cents in the same period last year.

Headline earnings, the main profit gauge in South Africa, exclude certain one-off and non trading items.

While international prices appear to have stabilized, the company said lingering weakness in the domestic economy continues to hit steel demand.

"Domestic sales are expected to remain flat and any increase in steel prices will be more than offset by increasing costs," it said in a statement.

The company, which sells 90 percent of its steel in Africa, said steel sales dropped 16 percent and liquid steel production declined 9 percent, primarily due to a fire at its Vanderbijlpark operations in February.

"On the positive side, the weakening in the rand exchange rate in May provided a strong underpin to our export sales towards the end of the half year although the impact on shipments will only materialize in the third quarter," the company said.

Shares in ArcelorMittal South Africa have fallen 25 percent over the last 12 months, underperforming a 19 percent gain in the JSE's All-share index.

Nigeria: 'Safer Mining Will Check Re-Occurrence of Lead Poisoning

With the announcement that 100 per cent remediation exercise had been completed in Bagega, Anka local government area, Zamfara State, following the 2010 Zamfara lead poisoning, attention now on the Ministry of Mines and Steel Development to ensure that safer mining is in place to avoid a reoccurrence, Ruth Tene Natsa and Evelyn Okoruwa report.

The Director, Artisanal and Small Scale Mining (ASM), Ministry of Mines and Steel Development, Obiorah Azubuike, has again reiterated that the safer mining programme for Zamfara State was on course.

Speaking in an exclusive interview with LEADERSHIP recently, he maintained that "the project was on course following a successful process of tendering, bidding and offer of contracts for the safer mining programme."

Azubuike revealed that the programme was implemented with the N158.3 million intervention fund which the federal government released to the ministry on safer mining programme in Zamfara State, adding that "government's intervention in the Zamfara lead poison in 2010 has made remarkable achievements particularly in the areas of environmental remediation, sensitisation on safer mining practice and treatment of the affected victims."

Safer mining, according to him, includes sensitisation on safer mining; procurement and installation of safer mining equipment; setting up of three mineral processing centers in the state; and provision of extension services to ASM cooperatives in the state, while revealing that one mining post at Bagega, Anka local government area, Zamfara State, had been completed while the one at Maru was still under construction.

Meanwhile, the Minister of Environment, Hajia Hadiza Mailafia, has confirmed that the N400 million environmental remediation exercise headed by her ministry was 100 per cent complete. She stated this while briefing journalists in Abuja on environmental remediation of lead contaminated sites in Bagega. Mailafia recalled that the president had released over N800 million in January to the Ministry of Health and the Ministry of Mines and Steel Development, which is in charge of safer mining techniques, to take care of the medical aspect while the Ministry of Environment handles environmental remediation.

She emphasised the need for more sensitisation to enlighten people on the negative effect of lead poisoning, listing the effects to include the tendency for children to have cognitive impairment and being likely to exhibit behaviors that are not in tandem with societal norms and values.

Confirming the minister's position on remediation, the Head, Medecins Sans Frontieres (Doctors Without Borders), Michelle Chouinard and the Director, Field Operations, TerraGraphics International Foundation, Simba Tirima, also confirmed that the remediation exercise at Bagega had been completed. The director made the assertion while on a visit to the Ministry of Mines and Steel Development recently where they called for further strategies and alliances to prevent future occurrences of lead poisoning in Zamfara and in any other state of the country.

TerraGraphics International Foundation is a United States of America-based company that partnered with the Federal Ministry of Environment to handle the remediation programme at Bagega while Medecins Sans Frontieres is involved in the treatment of the victims of the lead poison.

Tirima said he and Chouinard were impressed by what the Ministry of Mines and Steel Development was doing with the safer mining programme and reiterated their desire for continuous collaboration with the ministry and other stakeholders involved in the various intervention programmes.

Meanwhile, the Permanent Secretary, Ministry of Mines and Steel Development, Mr Linus Awute, who commended the team for their various roles in stopping incidents of death occasioned by the lead poison, said, "We are scaling up our programme of sensitisation on safer mining to prevent future occurrences of lead poisoning in Zamfara State and in other states of the country."

Accordingly, we have lined up some programmes for effective implementation of our work plan on a sustainable basis. The ministry's 2013 budget has a funding window for use in widening the scope of our mining extension services and inspectorate activities which are on-going," he said.

Mr Awute also disclosed that the ministry had procured safety kits and gadgets for safer mining for distribution to the artisanal and small scale miners at the critical flash points in Zamfara State where field demonstrations on best mining practices are being carried out by field officers of the ministry.

"The wet milling and Igoli machines for the safer mining programme ordered from South Africa would arrive the country soonest. On arrival the safer alternative equipment for processing of gold ores would be installed at the three mineral processing centers in Bagega, Kwali and Maru," he further informed.

According to the permanent secretary, three outposts would be constructed at Bagega, Kwali and Maru in Zamfara State. He stated that the outpost at Bagega had already been completed with a mineral buying centre and work was in progress on the completion of the other two outposts.

Reiterating the position of the ministry, Awute said, "The Ministry of Mines and Steel Development has plans in its future budgets to extend the safer mining programme to other states of the federation to build mineral processing centres among other things. All these are the painstaking efforts of government towards ensuring that avoidable environmental and health disasters are prevented in Nigeria's mining industry."