NCM’s main operations are in Australia, Indonesia, Papua New Guinea, Fiji and West Africa. The group’s flagship mine is PNG-based, Lihir, with the other offshore operations being Gosowong in Indonesia, Hidden Valley (50%-owned) in PNG and Bonriko in Ivory Coast.
NSW-based Cadia Valley and WA-based Telfer make up the company’s domestic operations.
Gold price plunge
Gold holdings at exchange traded funds (ETFs) have fallen significantly in 2013, with the drop in bullion holdings reflecting a dramatic fall in investment demand.
The plunge in gold prices has encouraged China and India, as well as the US and Perth Mints, to ramp up their physical purchases of bullion. However we believe the surge in ETF-related supply is overwhelming any physical demand for the precious metal.
The spot gold price has plunged 16% in the year to date amid a sharp deterioration in sentiment towards the precious metal. Global inflation remains low whilst the US central bank has flagged an end to its monetary stimulus measures sometime this year in response to a strengthening US economy.
We expect these headwinds to persist for a while yet, resulting in an environment where any short-term gain in gold prices is met by even stronger selling.
Higher cost mines threatened by gold
NCM is one of the higher cost gold producers in Australia. Cash costs were $1086 an ounce (oz) for the March 2013 quarter, with a number of its mines plagued by operational issues.
Telfer, which accounts for a quarter of overall production, had cash costs of $1162 an ounce.
This was 27% higher than the previous quarter due to weaker copper output, planned mill shutdowns and the sourcing of ore from higher cost open pit sources.
The group’s offshore mines, Gosowong, Hidden Valley and Bonriko, contribute around 20% of overall production. Cash costs at these mines were $806/oz, $1790/oz and $930, respectively.
With gold prices currently trading around $1400/oz, Hidden Valley has become uneconomical and Telfer’s cash margins are very tight, magnifying the threat of impairment charges at these mines.
A major problem for NCM and other higher cost gold producers is the impact plunging gold prices are having on mine profitability. Mine shutdowns and weaker output contributed to a big rise in quarterly cash costs at Telfer, whilst Hidden Valley has become uneconomical given how much cash costs exceed current gold prices.
We believe there is more weakness in store for gold prices, raising the threat of write-downs at NCM’s high-cost mines.