Commodities | Nov 27 2006
By Greg Peel
One of the responses to higher demand and higher prices for commodities is that supply capacity and exploration are suddenly ramped up. This is the standard cyclical response, and that which has lagged during the commodities boom due to years of underinvestment.
But while existing or new mining companies may redouble efforts to add to supply assets, the opposite is true at existing projects. When prices go up, production at existing projects is deliberately reduced.
Is this some form of sinister price manipulation? No. However, it does initially seem counterintuitive that miners would not attempt to increase existing production while prices are high.
In fact, while the production of metal at a mine is reduced, throughput of ore is not. Every mine contains ore of differing “grades”, which is a reference to the amount of metal existing per tonne of ore. When prices are low, it may not be commercial to bother processing the lower grade ore. But lower grade ore is not put out with the garbage. Rather, it is saved for a rainy day.
In mining terms, it’s been pouring down lately. So rather than processing higher grade ores in order to cash in on higher prices in the short term, miners turn to stockpiles of lower grade ores which can now be processed profitably. In processing the lower grade ore in times of higher prices, the life of a mine is increased. Miners can now stockpile higher grade ores.
The end result is that while processing throughput is maintained, the amount of metal produced is less. This is what gold consultants Surbiton & Associates found in their quarterly report released yesterday.
Surbiton noted that total Australian gold output rose slightly in the September quarter, but this is attributed to new gold operations reaching production. Ten new or recycled operations started up, while the amount of gold produced at existing mines remained relatively static in total.
The quarter saw 62 tonnes of gold produced, which is one tonne more than the June quarter but two tonnes less than the September quarter 2005. Production in the first nine months of 2006 has totalled 183 tonnes – 7% less than the equivalent period last year.
Production from existing mines was “variable”, notes Surbiton. The Barrick/Newmont venture known as the Super Pit returned to top of the table status with 178,000 ounces, while Newcrest’s (NCM) black sheep Telfer dropped off to 148,000 ounces. The Telfer reduction did not reflect further production problems, but a move to processing lower grade ores.
The Aussie dollar gold price has fallen from its highs of $933/oz in May to average $821/oz in the September quarter, however this is still $240/oz more than the September 2005 average. This difference is what has driven the move to treat lower grade ore. Surbiton points out that the average investor just doesn’t quite realise how much ore is treated just to produce one ounce of gold.
“It is pretty remarkable that gold can be extracted profitably from concentrations as low as 2 parts per million. It takes about 16 tonnes of ore to produce just one ounce of gold which is about the same size as a small square of chocolate”, noted Surbiton’s Dr Sandra Close.
Dr Close suggests that the treatment of lower grade ores in times of high prices is a “perfectly reasonable and rational response”. To do otherwise could be considered “an irresponsible and inefficient use of resources”.
“Responsible mining companies optimise both profits and production,” Dr Close said. “Their aim is to make good profits for the shareholders while extracting as much gold as possible from each deposit.”
It is also, of course, a win-win for miners, as flat to lower production only serves to support those higher prices that invoked lower grade ore treatment in the first place.