High gold prices are a boon for producers, but there is a downside
Australian gold producers have been benefiting from high prices combined with a favourable US dollar to Australian dollar exchange rate.
But it may surprise you to learn that high prices do have a potential downside.
UBS believes that the high Australian gold price may encourage miners to mill lower grade ore.
While this might extend mine life, it could also reduce production and lift costs.
The multinational bank says Northern Star (ASX:NST) is the most likely to choose this option for its Kalgoorlie operations and possibly its Jundee project in FY2021.
It noted the company had withdrawn its FY2020 production and cost guidance in March this year citing actions taken to manage COVID-19 and mobility restrictions.
However, while these changes have had a large impact on its Kalgoorlie and Jundee operations, UBS expects production to improve as the changes have been bedded down.
Northern Star is expected to have produced 272,000 ounces of gold at an all-in-sustained cost (AISC) of $1,522 per ounce in the June 2020 quarter.
It is expected to produce 1.13 million ounces of gold at an AISC of $1,452 per ounce in FY2021.
UBS also believes that consensus production forecasts of 773,000 ounces of gold for Evolution Mining (ASX:EVN) in FY2021 are too optimistic.
Its forecast is materially lower at 723,000 ounces as the bank believes that consensus production at the company’s Cowal and Red Lake projects is too high.
Cowal is undertaking the Stage H cutback and as a result is running on stockpiles that have lower grades than fresh ore.
Additionally, UBS believes that Evolution will focus on setting up the Red Lake mine for long-term success rather than immediate production.
UBS added that the inclusion of Red Lake would also increase the company’s costs as that operation is running at circa $2,200 an ounce.
Evolution is expected to have produced 210,000 ounces of gold in the June 2020 quarter at an AISC of $1,094.
UBS believes that Saracen Mineral Holdings (ASX:SAR) has the lowest risk of lower than expected production or higher costs of all the gold companies it covers.
This is because the company’s operations entered the June 2020 quarter with sizeable ore stockpiles and management has flagged the preference to mill higher grade stocks to increase cashflow and pay down debt.
UBS expects Saracen to have produced 166,000 ounces of gold at an AISC of $1,149 per ounce in the June 2020 quarter.
However, it noted that the company’s FY2021 production might drop to about 662,000 ounces at an AISC of $1,315 per ounce due to the move to prioritise higher grade stocks in the June 2020 quarter.
While UBS is providing production forecasts for some companies, there are others that have already got their FY2020 production numbers out of the door.
Alkane Resources (ASX:ALK) reported that its Tomingley Gold Operations met its FY2020 guidance, which was upgraded after the September 2019 quarter.
The company produced 33,507 ounces of gold, well within its guidance of between 30,000 ounces and 35,000 ounces.
Preliminary AISC has been calculated at a tidy $1,379 per ounce, which is again within its guidance of between $1,250 and $1,400 per ounce.
Alkane’s updated Tomingley mine plan is currently undergoing a final review and approval and will be released along with its FY2021 guidance.
Meanwhile, St Barbara (ASX:SBM) reported production of 108,612 ounces of gold during the June 2020 quarter, its first quarter with more than 100,000 ounces of production since the June 2018 quarter.
FY2020 production was 381,887 ounces, in line with its full-year production guidance of between 370,000 and 400,000 ounces of gold.