Australia’s gold sector has been warned that companies with good projects here or overseas will increasingly be targeted for acquisition as the global gold market undergoes significant transition because of cost and exploration pressures. Addressing the 2007 Paydirt Australian Gold Conference in Perth, World Gold Analyst Editor and Publisher, Paul Burton, said the pattern of global gold production had shifted away from the ‘Big Four’ producers – South Africa, the USA, Australia and Canada

"What we have seen in just ten years is a marked falloff by these four – South African output is down 41% for example and Australia’s output has collapsed 16%. South Africa used to command 21% of global gold output but is now down to 12%. They are losing share to the ‘new’ gold producer countries such as China, Russia and Peru.

"China for example is now the third largest producer in the world and will increase that further as the thousands of small domestic gold mines which have been unconsolidated, undercapitalized and inefficient, give way to foreign ownership and modern exploration, mining and processing."

Burton said the change trend was occurring at a time gold production had peaked – impacted by the five year low gold price up until 2001, the Bre-X scandal, exploration cutbacks, few discoveries and little or no new production coming on. Exploration expenditure was not being inflation adjusted, grassroots budgets were actually in decline yet input costs had risen. "Increased consolidation equals budget cuts on exploration which in turn precipitates heightened merger and acquisition activity. "The gold price climbed 24% in 2006 but cash costs by comparison have risen 19% over the same period.

"The majors are struggling to replace resources and will continue to lose ground to ‘new’ regions unless they cut costs to maintain a premium for their higher grade gold reserves. They should also consider focusing on multi-metal opportunities rather than singular gold assets as those with good gold projects will be targeted for acquisition and the merger and acquisition market is already placing a value on these ounces. This can be as much as $150/oz in South America ranging down to ‘new’ regions such as Asia where in-ground ounces can attract less than $25/oz – and therefore offer substantial upside potential," he said.

Also addressing the conference, Hartleys’ senior resources analyst, Andrew Rowell, said major new discoveries were needed in the Australian gold sector to re-energize it. "On the development side, we will see a trend to smaller, higher grade projects being commissioned and we should expect to see some ongoing industry consolidation at both smaller and larger levels," he said. "I expect future Australian gold projects will have larger critical mass before development decisions are approved and this will push projects out to five to seven year mine lives rather than the current three-to-four year expectation. Significantly, these future projects will be funded through increased equity backing with a reduced reliance on hedging and traditional bank financing."

"Many of these new generation Australian gold mines will also be found under cover and at depth – a departure from our historic reliance on near surface discoveries."

In a stark comparison of how the Australian gold sector has changed since 1997, Rowell said the sector had witnessed a dramatic shift in open pit mining levels from 60% of the country’s total gold mining to just 19% currently. This had generated a rise in cash costs from just under A$330/oz in 1997 to around A$480/oz currently – the increase only being offset by a ‘fortunate’ rise in the gold price over the same period.

"In 1997, Australia boasted 119 gold mines producing 9.9 Moz of gold per annum – this had dropped to 58 mines producing 8 Moz by last year," Rowell said. Of that original number, only 43 mines sustained production through the period and remain in operation – but only two of these are owned by the same 1997 owners.

"This reinforces the extent of the ‘Great Aussie gold selloff’," he said. "We used to own and control 91% of our national gold output in 1997 – slipping now to just 36% – those interests primarily being taken up by foreign gold companies from the US, Canada, South Africa and Switzerland. He said in that time, the contribution by Australia’s Top 20 mines had now been replicated by the Top 13 as the impact of merger and acquisition activity and mine closures, was felt.