Commodities

A Chennai housewife forecasts gold price for major producer

T. E. Raja Simhan Chennai | Updated on March 28, 2011

Mr Mark Cutifani, CEO, Anglogold Ashanti

A Chennai resident, Mr Srinivasan, gives the forecast on gold price to Anglogold Ashanti, world's third largest gold producing company. She is the mother of Mr Srinivasan Venkatakrishnan, Chief Financial Officer of Anglogold Ashanti.

“She has been the one who got it right over 80 per cent of the time. She seems to have got an intuitive feel of the price,” says Mr Mark Cutifani, CEO of the company.

Every week Mr Venkatakrishan, who is based in Johannesburg, speaks to his mother living in Chennai for the forecast. Indian families understand issues such as land/gold prices and inflation intuitively, and make wise decisions on when to and when not to buy. “Our conversations are very much around what Mrs Srinivasan sees in the market that many of the global experts do not on gold pricing,” says Mr Cutifani.

On his first visit to India, Mr Cutifani is highly impressed with the knowledge level among Indian consumers. “Indians are very sophisticated. Westerners are realising the need to invest in gold by following the Indians,” said the top official of the $4 billion Johannesburg-based company, which produces 4.6 million ounces (an ounce equals 30.103 gm) a year.

Speaking to Business Line at a resort in Mahabalipuram near Chennai last week, Mr Cutifani dealt on issues ranging from gold production to cost pressure and, more importantly, on shortage of gold in the market. “There is tremendous cost pressure in our industry,” he says. Excerpts from the interview:



World short of gold

At present, the total gold in circulation, or the total global stock above the ground, is 1,60,000 tonnes. If the world's economies grow at 3 per cent a year, it would mean 3 per cent of wealth should be added each year. And that means the industry should produce nearly 4,800 tonnes of gold every year (3 per cent of 1,60,000 tonne). But the production is not even half of that. “The world is short of gold,” he said.

Pricing pressure

The total cost of producing gold today is more than $1,000 an ounce, and that includes exploration, capital development, sustaining capital and other charges. The overall cost is heading towards $1,200 an ounce. But the major problem is the time taken from discovery to producing an ounce of gold is nearly 10 years. The capital commitment is significant and more than that the time involved, of putting a dollar in the ground and getting the return, is very long.

Value destroyed

In the last 20 years the gold producing industry has destroyed the value of the precious metal.

Only in the last two years has the industry seen positive returns, that is, above the cost of capital.

Even today the average returns would not be beyond 10 per cent despite the high gold price. The average production cost is going up by $100 an ounce each year.

There are a few factors on why the cost is going up. As there has been no return for the industry, there have been very few new gold discoveries.

The cost of discovery per ounce of gold has doubled in the last few years even as miners are mining every year 50 meters deeper, thus adding 3-5 per cent to the cost a year. The quality of the deposits has declined by more than 1.5 per cent a year for the last 20 years.

The new mines being developed are located far away, thereby adding to the logistics cost and the cost of providing support infrastructure such as developing new towns, and so on. Finally, the input inflation is at least four percentage points above the general inflation even as the capital items continue to be exposed to high inflation. So, on a real basis, the gold price is going up 10-12 per cent a year while on a nominal basis it is 15-16 per cent. That's what has happened in the last seven years. The pressure on the industry is 10-15 per cent every year and can only be offset by a company's ability to be innovative in its cost structures.

“We are no different from the Tatas on looking to improve productivity and reduce costs.”

The production price of around $1,400 is probably correct and will help the industry get a return on investment of around 10 per cent.

A $100 an ounce increase a year will help sustain that sort of increase but will not encourage crazy amounts into explorations and massive increases in production.

So, the cost of $1,450 an ounce and an increase of $100 an ounce every year is probably the right equation.

Major producers

Barrick Gold is the top producer with 7 million ounces followed by Newmount Mining Corporation (5 million) and Anglogold (4.6 million).

There could be around 20 substantive producers; around 50 small producers and a few individual producers.

Deposits

China does not have big deposits but many smaller ones, and accounts for around 10 per cent of the world's total gold production;

Australia accounts for 5 per cent and South Africa, 4 per cent. South America is growing and North America is flat.

You could see lots of action in the Middle East and Asia in the next 10 years.

Published on March 28, 2011

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