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Silver mine margins benefiting from falling costs

London based precious metals consultancy, Metals Focus has noted an improvement in operating margins at the silver mining operations it analyses as the mining companies have been succeeding in making some substantial unit costs savings.  With most silver production coming from countries which have seen significant currency depreciation against the US Dollar, this has played a significant part in the margin improvement.  The Metals Focus note on this from its latest Precious Metals Weekly newsletter follows:

In spite of a fall in silver prices, basic operating margins rose q-o-q in Q2.15, aided by some notable cost reductions. Utilising data from our Silver Mine Cost Service, primary by-product silver total cash costs saw a 12% decrease q-o-q, falling to US$6.84/oz, a level not seen since 2011. This continued decline in operating costs is linked to the depreciation of many producers’ currencies relative to the US dollar. Of note, the Mexican Peso and Peruvian Nuevo Sol weakened by a further 2-3% versus Q1.15. In addition to the positive FX impact, increased revenue from by-product credits also helped. Q-o-q, lead, zinc and copper prices rose by 7%, 5% and 4% respectively, although this was partially countered by a 2% reduction in gold. Outside of this, oil rose by 7% q-o-q (based on the Brent price), although at an average of $66/bbl it was still some 35% lower versus Q2.14. Global silver grades also remained unchanged, averaging 160 g/t over the past 12 months.

All-in sustaining costs continued to fall, although this was solely attributable to the decline in underlying total cash costs, with the all-in sustaining component actually rising by $0.55 q-o-q; this additional component includes items such as stay-in business capital, near mine exploration and corporate head office costs. Looking at the financial standing of the industry, based on an average silver price of $16.44 in Q2.15, just 9% of the industry was loss making on an all-in sustaining basis; in comparison, 23% of gold production was loss making on an all-in sustaining basis during the quarter.

Looking to the current quarter, although mine site costs will benefit from further domestic currency weakness and falling oil prices, costs in the current quarter will be impacted by falling by-product metal prices. To date in the third quarter, lead, zinc and gold are on average some 11%, 14% and 6% below their second quarter level, while the fact that silver itself is down 9% will further eat into producer margins.

Platinum fundamentals still look positive

The World Platinum Investment Council (WPIC) has announced  the publication of its fourth Platinum Quarterly – an independently-researched, freely-available, quarterly analysis of the global platinum market. The report incorporates analysis of platinum supply and demand during the second quarter of 2015.  This shows that basic fundamentals for the metal remain positive with the WPIC forecasting an increased supply deficit for the year due to increased investment activity compared with its Q1 analysis – however this has had little effect on the price performance which remains weak.

Overview of key data presented in the latest Platinum Quarterly: 

The global platinum market remained in deficit during the second quarter of 2015 with an estimated shortfall of 55 koz.

The key drivers behind the smaller deficit in Q2 2015 from today’s report include:

  • Increased mining supply from South Africa due to higher operational efficiencies and improved safety performance than in Q1 2015.
  • Lower jewellery demand in China, partly as expected, as Q1 2015 benefitted from Chinese New Year related sales.
  • A sharp increase in investment demand with significant growth in bar and ETF demand reversing the weakness in the preceding three quarters.
  • Robust automotive demand remaining at similar levels to Q1 2015 supported by strong vehicle sales in Western Europe.

Total global supply of platinum was 1,985 koz during the second quarter of 2015, with total mining supply estimated at 1,520 koz.

  • South African refined production rose to 1,080 koz as operational and safety performance improved, compared to the below par production of 890 koz in the first quarter of 2015.
  • Increased output from Zimbabwe and Russia contributed an additional 20 koz and 10 koz respectively to the increased mine supply, compared to the first quarter of 2015.
  • Supply from recycling increased 7% quarter-on-quarter to 465 koz, with growth in jewellery recycling offsetting slightly lower secondary supply from scrapped autocatalysts.

Total global demand for platinum was 2,040 koz during the second quarter of 2015, up 15 koz compared to the first quarter of 2015.

  • Automotive demand remained robust at 875 koz for Q2 2015, with strong demand from the main platinum markets of Western Europe and North America.
  • Platinum jewellery demand for the second quarter is estimated at 665 koz, an 11% decline quarter on quarter. Demand in China in Q2 eased as expected without the benefit of Chinese New Year related sales, due to the declining platinum price and ongoing lower gold related footfall through stores. Continued growth in jewellery sales in India softened the overall decline in the second quarter.
  • Industrial demand declined by an estimated 4% (15 koz) quarter-on-quarter to 400 koz in Q2 2015, primarily due to uneven timing in plant expansions in the glass and chemical sectors.
  • A sharp increase in investment demand reflected the increase in bar and coin sales and the turnaround in ETF demand, from three quarters of net sales (50 koz in Q1) to net purchases of 45 koz. The majority of gains were in the two South African funds, which increased their holdings by a combined 60 koz. US investors also moved from being net sellers in Q1 2015 to modest purchasers in Q2 2015, increasing their ETF holdings by 9koz.
  • Bar and coin purchases totalled 60 koz in Q2 2015 up from 35 koz in Q1 2015, as Japanese investors took advantage of lower prices in local currency terms.

The full year 2015 global platinum market deficit forecast increases to 445 koz from the 190 koz forecast in the Q1 2015 Platinum Quarterly. The sharp rise in investment demand in the second and third quarters of 2015 underpins the increased forecast.

  • The total supply forecast is expected to increase by 9% to 7,910 koz, with higher South African production reflecting the recovery from the 2014 strikes and contribution from an increase in recycling of 3%.
  • Total demand is forecast to reach 8,355 koz in 2015, representing 4% annual growth. This is primarily due to projected investment demand, which has been upwardly revised to 310 koz for the year following accelerated Japanese bar purchases and substantial ETF buying in South Africa.
  • The continued growth in automotive, industrial and investment demand is set to offset a decline in jewellery demand in 2015 when compared to 2014.
  • Autocatalyst demand is forecast to grow by 5% to 3,445 koz for the year.

Paul Wilson, chief executive officer of WPIC commented: “The fourth edition of Platinum Quarterly shows that developments in Q2 2015 support the forecast deficit in 2015 of 445 koz, which is significantly up from the 190 koz forecast in May. This is despite a smaller deficit for Q2 2015 than the 230 koz deficit in the first quarter following improved mine supply and, partly as expected, the seasonal decline in Chinese jewellery demand. The second and third quarters have also seen an encouraging turnaround in investor demand, with positive flows into the South African ETFs in particular”.

“While the past quarter has seen an improvement in mine supply due to improved mine performance, the medium term picture looks less promising. Our recently commissioned report by Venmyn Deloitte, an independent consultancy, highlights that the collapse of capital investment, from over $3 billion per annum in 2008 to under $1 billion per annum in 2015, has had a negative impact on South African platinum supply. Using capital expenditure alone as an indicator would imply that South African mining supply in 2016 and 2017 will be noticeably lower than 2015 levels and would support ongoing deficits in the platinum supply-demand balance.”

This edition of Platinum Quarterly may be downloaded free of charge from the WPIC’s website:

Australian golds benefit enormously from weak Aussie dollar

With the Australian dollar gold price currently sitting at over AUD $1,600, gold miners in the world’s second largest producing nation after China are seeing price strength, whereas their U.S. counterparts are seeing the opposite.  I have been pointing this out for some time – here and on other websites I write for – so its nice to see such a heavy hitter as the Metals Focus specialist precious metals consultancy coming up with commentary on the same theme.  The following is abstracted from their latest Precious Metals Weekly newsletter:

It’s not all doom and gloom for Australian Gold Miners

Gold priced in US dollar terms is languishing some 40% below the 2011 peaks, however, when priced in Australian dollars (AUD) it is just 11% down and since November has risen by some 24%. The Australian economy is heavily exposed to the commodities sector and has been one of the hardest hit by the general decline in prices. The AUD, which at its peak would buy 1.10 US dollars (USD) has now declined by 36% and can now purchase 0.70 USD.

One of the features of the recent commodity bull market was a high cost inflation environment. Particular pressure was felt from labour costs, as shortages of skilled personnel and competition from bulk commodities drove wages up. Labour often makes up as much as 50% of a mine site’s costs. The slowdown across the commodities sector over the last few years has now led to less competition and an end to above inflation wage demands. Other input costs such as oil, which on average makes up circa 10% of mine site cost, have also dropped significantly (circa 40%) over the last year.

Looking at the second quarter 2015 and focusing on Australian producers, total cash costs have averaged A$805/oz and all-in sustaining costs (AISC) averaged A$1,124/oz, a decline of 9% and 4% from their Q2 2013 peaks. But in US$ terms, when the benefits of the fall in the Australian dollar are added in, costs have fallen by 28% and 26% respectively. This has helped mining companies increase their basic margin between AISC and the gold price to A$401/oz, from the low of A$243/oz which was hit in Q2 2013.

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Official: IMF extends composition of current SDR basket for 9 months.

In an announcement today, the IMF Executive Board has confirmed the previously suggested extension of the current SDR basket of currencies by nine months from December 31 this year up until September 30th next.  This leaves the way open for changes to be made, and implemented, in the structure of the SDR basket for a revised basket (if so chosen) to be implemented in October 2016.

The proposal for the extension was put forward by IMF staff in a paper published on August 4, 2015 (see Review of the Method of Valuation of the SDR – Initial Considerations) and subsequently submitted to the Executive Board for lapse-of-time decision.

Normally the IMF would review, and restructure if it chooses to do so, the SDR basket every five years which would have made this process due to be announced in October this year, and implemented at the beginning of next.  However the extension is undoubtedly due to internal arguments over the inclusion of the Chinese renminbi and the delay gives the Chinese time to meet some of the requirements of key IMF board members (the USA?)  which have almost certainly already led to China’s recent renminbi devaluation against the U.S. dollar.  This may at least give it the appearance of no longer being tied directly to the greenback with which it had been in lockstep for a number of years.  Whether China will allow a full float of the renminbi on the global currency markets remains to be seen – this may be a step too far, and perhaps also an over-worrying move if implemented for some IMF board members (the USA again?)

The official statement from the IMF says that the ‘nine-month extension is intended to facilitate the continued smooth functioning of SDR-related operations and responds to feedback from SDR users on the desirability of avoiding changes in the basket at the end of the calendar year. The extension would also allow users sufficient lead time to adjust in the event that a decision were to be taken to add a new currency to the SDR basket.’ (The italics are ours – with the only currency likely being considered for inclusion being the Chinese renminbi, and with the country’s now global top GDP status as confirmed by the IMF, it would presumably form a major – if not the major – currency in the SDR basket.)

The inclusion of the renminbi in the SDR basket may be seen by many as downgrading the status of the U.S. dollar in global trade and even possibly as the leading global reserve currency with all the advantages that brings.  However any such change in status may take some years to take effect.

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World’s largest gold miner suffers credit downgrade to near junk status

Barrick Gold (ABX) the world’s largest gold mining company, has seen its credit rating downgraded to only one notch above ‘junk’ status by major credit rating agency, Moody’s.  Given Barrick’s debt position this might not be considered a surprise given another major credit rating agency, S&P, had already downgraded it to a similar level back in March.

The London arm of Investec, in its daily news comment, noted that this latest credit rating move by Moody’s has highlighted the major problem faced by many highly indebted mining companies regarding their ability to pay off debt over the long term given the current low commodity prices and the reckoning that these prices may not show any improvement in the short and medium term at least.  Investec thus expects rating downgrades to increase across the mining sector.


In announcing the downgrade, Moody’s made the following statement on its reasoning and on Barrick’s position as the credit rating agency sees it:

“Barrick has been downgraded because its leverage will remain elevated even after announced asset sales, material organic debt reduction is unlikely and production will start declining in the next several years”, said Darren Kirk, Moody’s vice president and senior credit officer.

Barrick’s Baa3 rating is underpinned by its large scale, diverse and low-cost gold assets, sizeable copper operations, favorable geopolitical risks and excellent liquidity. Moody’s expects Barrick will achieve its debt reduction target of $3 billion by the end of 2015 and that the company will continue to take aggressive actions to further reduce its costs and capital requirements in response to the current, lower gold price environment. Moody’s expects Barrick’s adjusted financial leverage will range between 3.5x to 3x through 2016, assuming a gold price between $1100/oz and $1200/oz. Barrick is likely to restrain its capital expenditures below production maintenance levels through the next couple of years in Moody’s opinion, in order to generate roughly breakeven free cash flow. Moody’s estimates Barrick’s organic gold production will remain relatively stable through 2017, but then begin to decline.

Barrick’s liquidity is excellent, which provides significant flexibility to maneuver through a low gold price environment. Cash of $2.1 billion and an undrawn $4 billion revolver (matures 2020) will be supplemented by pending asset sale proceeds of almost $2.5 billion. These liquidity sources are ample to fund mandatory debt repayments of $460 million through Q2/16 and they could eliminate all of Barrick’s debt maturities through 2020 if the company prioritizes repayment of its near term debt obligations with its asset sale proceeds. Moody’s expects that Barrick will produce breakeven free cash flow over the next year and maintain acceptable headroom to its consolidated tangible net worth covenant in its bank credit facility ($5.7 billion at Q2/15 versus a minimum of $3 billion).

The stable ratings outlook assumes Barrick will continue to make cost improvements a priority, and will continue to seek ways to opportunistically reduce its debt and leverage through asset sales or other means, particularly should the gold price remain below $1,200/oz.

An upgrade to Baa2 could occur should Barrick’s operating cash flows be able to fund the necessary investments to achieve at least stable production over time as well as sustain Debt/ EBITDA below 2.5x and cash from operations less dividends/ debt around 30%.

Barrick’s rating could be downgraded to Ba1 if Debt/ EBITDA appeared likely to be sustained above 3.25x and cash from operations less dividends/ debt sustained below 20%.

Global gold demand down 12% Q2 2015

The latest run of statistics from the World Gold Council has been released in the form of its Q2 Gold Demand Trends analysis with data nowadays being provided by London-based precious metals consultancy – Metals Focus.  While it finds that global demand is down 12% year on year it notes that there is a good likelihood that demand will pick up well in the second half – indeed the latest gold price moves and figures for Indian imports and SGE withdrawals suggest that this may already be happening.  On the Fundamentals front it also noted that supply was down 5% with an increase in mine supply being more than countered by a fall in gold scrap supplies. Central bank purchases were down year on year but still remained strong with the Q2 figure up on that for Q1.

The World Gold Council’s own release on the latest figures, with links to the full report, follows:

The World Gold Council’s Gold Demand Trends report for Q2 2015 shows total demand was 915 tonnes (t), a fall of 12% compared to the same period last year, due mainly to a decline in demand from consumers in India and China. However, demand in Europe and the US grew, driven by a mixture of increasingly confident jewellery buyers and strong demand for bars and coins. Looking ahead, there are encouraging signs moving into what are traditionally the busiest quarters for gold buying in India and China.

Overall jewellery demand was down 14% to 513t, from 595t in 2014 due to falls in consumer spending in Asia. In China, slowing economic growth and a rallying stock market led to a 5% fall in demand to 174t. In India, the heavy unseasonal rains in Q1 and drought in Q2 impacted rural incomes and affected gold demand. In addition, a dearth of auspicious days for marriages in Q3 meant that wedding-related demand was unusually slow, leading to a fall in jewellery demand of 23% to 118t. Overall, if we look at the picture for the first half of this year in India, jewellery was down 3% to 268.8t from 276.1t (H1 2014). The US remained steady, with jewellery demand up for the sixth consecutive quarter by 2% (26t). In Europe demand was also up, with Germany up 7% and the UK and Spain both growing by 6%.

Global investment demand was down 11% to 179t from 200t in Q2 2014. India was the main driver of the fall, down 30% to 37t, due to uncertain price expectations and a buoyant stock market. This was countered by a rise in Chinese bar and coin demand, up 6% to 42t. In Europe, fears of a potential Greek exit from the eurozone saw retail investment in gold reach 47t, a rise of 19% compared to last year. The US also saw strong demand, with retail investment increasing by 7%. Of particular note was the huge burst of activity in June, when bullion coin sales by the US Mint hit a 17-month high.

Elsewhere, central banks continued to be strong buyers of gold. Net official sector purchases totalled 137t, with Russia and Kazakhstan the biggest purchasers. Although a year-on-year fall of 13%, buying increased by 11% when compared with the first quarter of this year. It is the 18th consecutive quarter where central banks were net purchasers of gold.

Total supply was down 5% to 1,033t, as an increase in mine production of 3% to 787t in Q2 2015 was offset by declining recycling levels – down 8% to 251t. The indication for H2 2015 is that mine production will slow as the gold mining industry continues to manage their costs and optimise operations in the face of challenging markets.

Alistair Hewitt, Head of Market Intelligence at the World Gold Council, said:

“It’s been a challenging market for gold this quarter, particularly in Asia, on the back of falls in India and China. The reverse is true for western jewellery markets, as increased economic confidence led to continued growth in consumer demand. It is  fair to say that investment demand for the quarter remained muted given the continuing recovery in the US economy and booming stock markets in India and China during the quarter. 

Jewellery market prospects look healthier for the remainder of the year with the upcoming wedding and festival season in India. In addition, falls in the gold price have historically triggered buying in price sensitive markets and we are already seeing early indications of this across Asia and the Middle East. Conversely, sharp falls in Chinese stock markets have shaken the largely consumer investment base and we are seeing early indications of interest in buying gold again – all illustrating the unique self balancing nature of gold demand and the diverse drivers which underpin it.” 

Gold demand and supply statistics for Q2 2015

  • Overall demand was down 12% in Q2 2015 to 915t compared to 1,038t in Q2 2014.
  • Total consumer demand – made up of jewellery demand and coin and bar demand – totalled 715t, down 14% compared to Q2 2014.
  • Global jewellery demand was 513t, down 14% compared to the same period last year, due to falls in China, down 5% to 174t, as well as India, down 23% to 118t.  The US and Europe saw continued growth with the US up 2% to 26t, and Europe up 1% to 15t.
  • Total investment demand was down 11% to 179t, compared to 200t in the same quarter the previous year. Demand for bars and coins saw a 15% drop to 201t from 238t  the previous year, as the sector was affected by an expected increase in US interest rates and a continued shift towards other asset classes, notably equities. ETFs saw outflows totalling 23t, lower than the outflows of 38t seen in the same quarter last year.
  • Central banks continued to be strong buyers of gold, accounting for 137t in Q2 2015, slightly down on the equivalent quarter last year, but up 11% compared to the previous quarter. It was the 18th consecutive quarter where central banks were net purchasers.
  • Year-on-year quarterly mine production increased 3% to 787t in Q2 2015, against 763t in Q2 2014. Recycling levels were down 8% year-on-year to 251t compared to 273t in Q2 2014, resulting in total supply falling 5% to 1,033t.

The Q2 2015 Gold Demand Trends report, which includes comprehensive data provided by Metals Focus, can be viewed at on our iOS and Android apps..

You can follow the World Gold Council on Twitter at @goldcouncil and Like on Facebook

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Low prices to weigh on gold production – Metals Focus

Low prices to weigh on gold production – Metals Focus

London based specialist precious metals consultancy, Metals Focus, presents its views on the likelihood of mine closures in its latest weekly Precious Metals Focus letter.  A lightly edited version of its letter, plus some additional comment, follows:

With the gold price sitting under $1,100/oz for the first time since early 2010, a significant portion of global production is now operating at a loss. At first glance with costs during Q1 15 averaging $687/oz on a total cash cost basis (TCC) and $878/oz on an all-in sustaining (AISC) basis, it would appear that the industry should be in good shape. However, the cost curve published in the consultancy’s latest gold report tells a different story.

Looking at the global cost curve, which represents some 1,650t of annual production. On a TCC basis, at $1,100/oz just 4% of the cost curve finds itself under water, although if gold was to fall to $1,000/oz, this would increase to 10%. However, on an AISC basis the proportion of loss making mines at $1,100/oz swells to 24%, or circa 400t of annual gold production.  Obviously a higher proportion would fall into the category at lower gold prices.

But before we draw to the conclusion that production is therefore about to fall dramatically, there are a whole multitude of factors that need to be considered reckons Metals Focus.

Firstly, closing a mine in itself is often a very costly undertaking. The workforce for instance, may be entitled to some redundancy or retraining payments. Meanwhile, decommissioning of the process plant and mining equipment, as well as reclamation of the land and watercourses and any necessary environmental remediation has to be accounted for. Because of this, rather than closing an operation, mining companies will often be prepared to operate at a loss in the short term in the hope that commodity prices recover.

When looking at the potential of mine closures, it is also worth considering the geographic distribution of these loss making operations. On an AISC basis, 20% of current unprofitable production is based in South Africa, where as has been witnessed in the platinum industry cutting production is a particularly difficult process, thanks to the high levels of union representation and the country’s already high unemployment rate. Currently there is the potential for disruption as Unions and the mining companies remain well apart in the latest round of wage negotiations.  In contrast, Australia, which hosts 18% of the loss making production, is a more likely candidate to see some production cuts. This said, closing a mine is often the last choice, instead companies are looking at other ways to lower costs.

One of the main constituents of the AISC is corporate costs (G&A). This metric has already been a major target of cost reduction. In our Gold Peer Group Analysis Report, average G&A costs have fallen from a peak of US$53/oz in Q1 13 to US$36/oz in Q1 15. However, for some smaller producing companies G&A costs are still over $100/oz. One way in which G&A costs can be lowered is through company consolidation, allowing duplicated services at the head office level to be cut. This in our view is helping to prompt some of the recent increase in M&A activity. Oceana Gold’s proposed takeover of Romarco Minerals is a good example, during 2014.  Oceana’s G&A costs per ounce of gold production was $112, but by 2017 Oceana is aiming to produce 540koz, which would lower G&A costs to $64/oz, assuming head office costs remain fixed.

Furthermore, as was the case in 2014, depreciating producer currencies continue to be key in helping miners cut US dollar denominated costs. Both the Rand, Canadian and Australian dollars, are currently close to or more than 20% weaker than the 2014 mean rates. In particular, weakening domestic currencies tend to have the greatest impact on higher cost operations, which are often more labour intensive, and as such gain most from the effect decline in salary costs on a US dollar basis. That said, for some of those at the top end of the cost curve the future looks bleak, and closure now seem inevitable. Over the 12 months Metals Focus estimates that there will be around 75t of cost related closures globally.

At lawrieongold we are not sure whether even this level of closures will be any help in salvaging gold prices from their current low level, or in helping prevent further falls.  To put it into context this is only around the level of the amount of physical gold that passed through the Shanghai Gold Exchange in the last reported week’s trading.  (See: Enormous physical gold demand on at least three continents), so will it have any significant effect.  We somehow doubt it.  But the longer prices stay down, or fall further, the closure numbers, either through company initiated shutdowns because of costs, or natural wastage through declining reserves, coupled with the accompanying fall in building of new projects may begin to have an effect, but this could yet be another year or more away even if prices were to remain at current levels or lower.