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Gold mining industry telling half-baked cost story – Nick Holland

13 Sep 2012
JOHANNESBURG ( – The gold mining industry was shooting itself in the foot by telling only half of the real cost story, Gold Fields CEO Nick Holland has told the Denver Gold Forum.

Operating costs were increasing while yields were declining and total expenditure had grown in line with the gold price, Holland said in a 30-slide presentation.

While the industry often spoke about its low cash costs and the money it was making at the earnings before interest, tax, depreciation and amortisation level, the real measure was all-in costs, or Gold Fields’ proprietary notional cash expenditure (NCE) measure, which showed the real cost rise.

This showed that the industry’s total all-in NCE costs rise of 21% over five years matched the gold price’s 21% rise over the same period.

“The real picture is that we don’t really make that much money,” Holland said.

The investors understand that, which was why there had been a rise in the acceptance of exchange traded funds (ETFs) to a level of 2 500 t worth $120-billion.

Gold mining stocks had to ensure that they provided returns that beat the ETF, but investors were sceptical about whether they were seeing genuine production growth or just replenishment.

Part of the problem was that the top-eight gold-mining companies that made up 40% of the industry had declined by about 2% a year over the last six years. Also, growth just for growth’s sake was part of the problem.

The other big problem was the calling down of the gold price year after year. Even though gold price consensus forecasts had been horribly wrong in the last six years, this had not deterred more forecasting of eventual price decline.

A long-term gold price of $1 300/oz in nominal terms was again being forecast, against the backdrop of an industry that had an all-in cost already well over $1 300/oz in today’s money.

“If the analysts’ forecasts are correct, we don’t have an industry going forward,” Holland said.

Those forecasts frightened investors into buying the ETF and avoiding gold stocks.

“I think we have to believe in the gold price. The gold price has done well and it continues to do well,” he added.