Gold-mining giants face challenge from low-cost producers as price plunges
Monday 03 November 1997
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.
- 1 Migrant crisis: Greek soldier saved 20 people singlehandedly off Rhodes beach
- 2 Sofyen Belamouadden murder: The inside story of a crime that horrified Britain
- 3 Company breaks open Apple Watch to discover what it says is 'planned obsolescence'
- 5 UK weather: Britain braced for snow as arctic air mass moves in
Migrant crisis: Greek soldier saved 20 people singlehandedly off Rhodes beach
Ian Brady: Moors murderer announces his support for Ukip and the SNP
Aaron and Melissa Klein: Oregon anti-gay bakers ordered to pay $135,000 after refusing to make cake for same-sex wedding
UK weather: Britain braced for snow as arctic air mass moves in
Bali Nine executions in Indonesia: Death row British grandmother Lindsay Sandiford says she 'just wants to get it over with'
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband
The sickening truth about food banks that the Tories don't want you to know
Migrant boat disaster: Ukip candidate mocks victims in sickening Twitter post
Nigel Farage wants the BBC to stop making programmes like Doctor Who, Strictly Come Dancing, and Top Gear
Global warming: Scientists say temperatures could rise by 6C by 2100 and call for action ahead of UN meeting in Paris
General Election 2015: Britain would become a 'communist dictatorship' under Ed Miliband and Nicola Sturgeon, claims wife of Michael Gove
iJobs Money & Business
£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...
£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...
£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...
£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...