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Gold Fields CEO says WGC's reporting guidelines stoking resource nationalism

Gold Fields Ltd. CEO Nick Holland says successive World Gold Council changes to cost reporting guidelines since 2013 are stoking resource nationalism by making it appear miners are making more money than they are.

Addressing the Africa Down Under conference in Perth, Australia, on Sept. 5, Holland cited 2013 when WGC brought in a new cost reporting standard where any capital expenditure that could materially increase production could be classified as non-sustaining.

Then in November 2018, it changed the definition of non-sustaining costs incurred at "new operations" and costs related to "major projects at existing operations" from being those which materially increase production, to those which materially benefit the operation.

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Gold Fields CEO Nick Holland addresses Africa Down Under.
Source: Paydirt Media/Brian Charlton

Holland said these measures have given companies more flexibility in allocating costs between "sustaining" and "non-sustaining," so all-in sustaining costs become less representative of what it really costs to produce an ounce of gold.

Actual costs are therefore higher than the industry is reporting, so Holland said cost reporting is "shrouding an industry that's probably under-capitalized."

Governments and communities are also given the impression that old miners are making more money than they actually are, thus "we could be actually feeding the fire of resource nationalism" because governments will want a bigger slice of the pie.

This has also led to costs reporting becoming more opaque, and even misleading, he said, as expenditure classified by the industry as "growth" or "non-sustaining" has increased significantly yet global mine supply has slowed significantly, rising only 1.8% in 2018 compared to 6.2% in 2013.

He argued that "growth capital is therefore not really growth as the industry is not significantly increasing production, especially not the majors," citing 2018 when almost half of all of the gold capital and exploration spend was classified as non-sustaining and therefore not disclosed in reported costs.

In light of this, Holland said companies should be more transparent on reporting and show all-in costs which should be come the "industry standard" and maintain profit-driven capital discipline rather than spend money just because the gold price is up.

That discipline also means maintaining cut-off grades even amid a rising gold price environment so marginal, low-grade material is not mined unnecessarily.

Holland said gold miners aren't spending enough to sustain production let alone grow it, and what's often referred to now as "growth capital" will at best only sustain the current production base, "and maybe not even that."

While industry has brought costs down, that's been assisted by exchange rates in Australia, Canada and South Africa, and Holland said mining costs would end up rising due to deepening mines, declining grades and the rise in more complex ore bodies that don't lend themselves of conventional cyanidation and will need additional processing techniques.

Of particular concern to Holland is the notable drop in sustaining capital, or stay-in-business capex, from US$313 per ounce in 2012 to US$166/ounce in 2016 and has stayed at those levels in 2017 and 2018.

Future requirements

Exploration budgets were also slashed in the wake of the 2012 gold price crash before only starting to rise again in 2017, but even then it was still at significantly lower levels than in 2012.

Holland said industry can potentially sustain production at current levels for "the next few years" before entering a period of "secular decline" in the longer-term. In the first half of 2018, The WGC also predicted such an eventuality.

He cited the WGC's estimate that an incentive price of US$1,500/ounce will be needed to maintain global production at current levels, in an environment where the average reserve life has dropped from more than 25 years to less than 15 years in the past seven years.

This coincided with forecasts of a fall in average grades from current levels of 7 g/t to 1.25 g/t by 2025 and a forced increase in total throughput volumes from 4 million tonnes per annum to about 5.5 million tonnes per annum.

Thus "the big cut in costs and exploration spend over the last decade is now manifesting itself in low reserves and possibly lower production, probably at higher cost," Holland said.