Gold-mining giants face challenge from low-cost producers as price plunges

The continuing slump in world gold prices - which last week fell to a 12-year low - could put many established deep mines out of business, according to rival low- cost producers. Clifford German reports.

The warning of a global shake-out came with growing indications that Italy could become a leading gold-producing province by the new millennium if one new entrant fulfils its early promise. It is Gold Mines of Sardinia (GMS), listed on the Alternative Investment Market in London, which opened a new mine on the Mediterranean island this summer.

Its first quarterly report on Friday showed it produced 1,893 ounces of gold in its first six weeks, including 670 ounces in the final week when the mine was operating at planned capacity. The mine's average cost of production is $222 an ounce, well below the current price of gold, which closed at $313.25 an ounce in London on Friday.

As John Morris, the chief executive of GMS, points out, at least 30 per cent of the world output is uneconomic at present prices and further falls in the price would lead to a marked reduction in the supply of new-mined gold. Some deep South African mines have production costs of up to $350 an ounce.

The price of gold fell again last week to its lowest level since July 1985, after a study by Swiss officials claimed the central bank of Switzerland could sell 1,400 tonnes of gold, more than half its reserves. Sales could not begin unless they are approved by a national referendum, which cannot be held before 1999, but the sale would be the equivalent of six months' world-wide production. Analysts predict that the gold price could fall below $300 in the near future.

Commercial demand for gold, mainly for jewellery and industrial uses, consistently exceeds the supply of newly mined gold each year by around 50 per cent. But speculative demand for bullion is now insignificant, and the market is overhung by the combined gold reserves of the International Monetary Fund and dozens of central banks, which between them hold enough gold to meet world-wide demand for 10 years.

The market has been further depressed by excessive forward sales of gold, which has not yet been mined, by mining companies anxious to speed up their cash flows.

The discovery of gold on Sardinia is a recent event. The metal is not visible to the naked eye, and it took a group of incredulous geology students to detect it and a team of Australian mining entrepreneurs to extract it. But the island has large areas of low-grade gold ore both at depth and close to the surface, where it is relatively easy to mine and refine.

The whole island is rich in minerals but few ventures have been commercially successful and the last lead-zinc mine closed down just this summer. The island is also awash with earth-moving machinery and crushing mills left over from lead, zinc and copper mines.

GMS was listed on AIM last year and has the backing of Rothschilds, Fidelity and Henderson, while brokers Williams de Broe have put UK private clients into the stock. The regional government authority, EMSA, also took a 30 per cent stake.

Output is expected to reach 40,000 ounces a year shortly, rising to 70,000 ounces a year by the end of 1998 if additional capacity is brought on stream. As output rises there will be problems separating gold from the copper content of the ore, which increases as the mine goes deeper, but these are two or three years away.

If all goes well, future development could be farmed out to joint ventures with established giants like BHP and Minorco. The shares have ranged from 12p to 33.5p since they were listed. Last week they closed at 24.25p.

Suggested Topics
News
i100
News
Netherlands' goalkeeper Tim Krul fails to make a save from Costa Rica's midfielder Celso Borges during a penalty shoot-out in the quarter-final between Netherlands and Costa Rica during the 2014 FIFA World Cup
newsGoalkeepers suffer from 'gambler’s fallacy' during shoot-outs
News
people
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmReview: A week late, Secret Cinema arrives as interactive screening goes Back to the Future
PROMOTED VIDEO
Travel
travel
Arts and Entertainment
Sydney and Melbourne are locked in a row over giant milk crates
artCultural relations between Sydney and Melbourne soured by row over milk crate art instillation
Arts and Entertainment
Adèle Exarchopoulos and Léa Seydoux play teeneage lovers in the French erotic drama 'Blue Is The Warmest Colour' - The survey found four times as many women admitting to same-sex experiences than 20 years ago
filmBlue Is The Warmest Colour, Bojack Horseman and Hobbit on the way
Arts and Entertainment
Preparations begin for Edinburgh Festival 2014
Edinburgh festivalAll the best shows to see at Edinburgh this year
News
Two giraffes pictured on Garsfontein Road, Centurion, South Africa.
i100
Environment
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Regulatory Reporting-MI-Bank-Cardiff-£300/day

£200 - £500 per day + competitive: Orgtel: I am currently working on a large p...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Training Programme Manager (Learning and Development)-London

£28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...

1st Line Support Technician / Application Support

£20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

Day In a Page

Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices