THE GREAT GOLD RENAISSANCE

S E Close

Today Australia is one of the world’s largest gold producing countries and gold is one of its top export commodities. Yet just 25 years ago, gold mining was only an insignificant part of Australia’s resources industry. The remarkable rebirth of what is now a major sector of the industry prompted former geologist, banker, corporate manager and now consultant, Sandra Close to document why it all happened, what drove the boom and where the industry might be going. Her book, “The Great Gold Renaissance – The Untold Story of the Modern Australian Gold Boom 1982-2002” is the result of that research and the experience she has gained in a career spanning over 40 years in the resources sector.
Many books dealing with the social history of gold mining have been written but books that describe and analyse an entire industry are rare, particularly those written from a technical, financial and commercial viewpoint. Probably not since the early 1900s has such a work been published on the Australian gold industry. The comprehensive nature of the book provides both a valuable insight into and record of the past, as well as a basis for strategic decision making.
In this article Dr Close gives a taste of some of the aspects covered in her book.

Most people are familiar with the First Australian Gold Boom and the gold rushes of the 1850s. Fewer know of the Second Boom that peaked in the early 1900s with the discovery and development of the famous gold deposits of the Golden Mile in Western Australia. Although there was a lift in gold production in the Depression years of the 1930s, this at best only qualifies as a “mini-boom.”

By far the largest boom in terms of gold produced is the Third or Modern Gold Boom, which commenced in 1982, the first year that Australian gold output began to rise substantially. Some 4,000 tonnes of gold has been produced to date during the Modern Boom. This is 40% of the total of around 10,000 tonnes of gold that has been mined in Australia in the last 150 years. Despite its size, the Modern Boom is the least known.

Just why did Australia’s gold output jump from less than 20 tonnes per year before the boom to a peak of 314 tonnes in 1997? Why, if the gold price was allowed to float freely in 1971, did it take a decade before Australian gold output began to rise at all? How was the new carbon-in-pulp technology introduced in Australia? What could be learnt from the factors that fuelled the boom which might assist in setting future directions? Above all, why, with all these questions waiting to be answered, had no one tackled this subject before?

There are two obvious factors on which the Modern Boom was based and these are described in some detail in the book. Firstly, there was the change from a fixed to a floating price for gold in August 1971. The official gold price had remained fixed at US$35 per ounce since 1934, although in Australia the decline in the strength of Sterling and in the Australian pound/dollar versus the US dollar had afforded some relief. By 1973 the average annual gold price had risen to almost US$100 per ounce and for 1974 it was near US$160 per ounce. The gold price peaked in US dollar terms at US$850 per ounce on 21 January 1980.

The second obvious factor was a major change in processing technology. In 1973 the first commercial scale plant to extract gold from its ores using the carbon-in-pulp (CIP) process was constructed by Homestake Mining Co, in conjunction with the US Bureau of Mines, at Lead, South Dakota. The modern CIP process was the result of many years’ research by workers in the US and South Africa, although in fact many of the steps in the process were pioneered in Australia up to a century earlier. Within a decade the new process replaced the Cyanide /Merrill-Crowe Process for gold extraction and also rendered amalgamation obsolete.

In Australia, by the mid-1970s a few companies and syndicates were already beginning to use the new CIP process. While some of these early attempts failed, others were successful in adapting to local conditions. The details of some of these early ventures and the stories of the people who experimented with the new technology make fascinating reading.

However, it was not until 1982 that Australian gold production first showed any significant increase, rising by 50 per cent in one year to 27 tonnes. This was the same year that the Australian dollar sank below parity with the US dollar on its long-term downward trend against the US currency.

There were many reasons why the rise in gold output had not occurred more quickly. In Australia during the 1970s, most resources companies were chasing energy minerals – coal, oil, gas and uranium, because of the oil shocks of 1973 and 1979/80. There were also a large number of other mineral developments underway. From a resources industry perspective gold was simply was not a high priority and gold exploration and particularly sample analysis, was costly. From an investor perspective there were many other more attractive opportunities. Also, gold prices in the mid-1970s were highly volatile and gold projects were seen as risky.

Eventually, record gold prices made gold too attractive to ignore – as an exploration target or an investment play.

One of the attractions of gold for Australian producers and investors at that time was that under Australian tax legislation, income from gold mining was tax-free. Tax on profits from gold mining and on dividends paid by gold mining companies had been removed in 1924 to assist the then struggling industry. As the gold industry revived during the 1980s, the tax-free status of income from gold, together with other taxation incentives, stimulated its rapid resurgence.

The taxation provisions and the economic environment of the time resulted in the evolution of some very innovative methods for financing new gold developments and also for selling the gold that was subsequently produced. Under such a regime, debt financing of new projects was unattractive, as interest payments on loans could not be written off as an expense against profits. Similarly, depreciation could not be deducted since the gold mining company did not pay tax. It therefore made sense for the larger companies to structure their gold mining subsidiaries carefully so that the very attractive investment allowances and accelerated depreciation provisions could be efficiently used and the tax advantages could be maximised.

Gold loans were developed as a means of financing for small companies that did not have a large parent to turn to, or did not have sufficient creditworthiness to borrow in their own right. Essentially a bullion bank provided gold to the company in need of funds. That gold was sold on the open market to provide the finance for the new gold development. Later, the bullion bank was repaid in physical gold. The first gold loan of this type identified was made to the Grants Patch group in late 1983 or early 1984. A larger and much better known loan was made to Pancontinental Mining for its Paddington project in mid 1984.

The first identified instance of producer forward selling was in late 1981. While primarily a risk management tool, forward sales and the many forms of hedging that were subsequently developed had additional attractions. As long as no tax was paid on income from gold mining, it made sense for a gold mining company to maximise gold mining income while minimising the costs of gold production. One way of increasing sales revenue was to sell gold forward and to pick up the contango or forward premium – tax free – in the sale price. In the early 1980s, interest rates were still very high by current day standards and contangos were simply too large to forgo. Australian gold producers embraced forward selling with enthusiasm and bullion banks in Australia led the world in developing a whole range of flexible products for this purpose.

One way of reducing production costs was to employ a contractor to do the actual mining. Prior to the 1980s, mining or overburden stripping by contractors was rare. However, by adopting contract mining, a gold producing company had no need to invest in excavators or a fleet of mining trucks. The contractor, being a tax paying entity, could utilise the both the investment allowance and accelerated depreciation and could pass these benefits back to the mine owner in the form of lower contract prices. In addition, by having multiple mining contracts at different projects, the contractor could maintain a more varied mining fleet and could transfer the most appropriate equipment to each project as they developed and matured. Also, the contractor offered the benefit of experienced staff to companies that had previously not operated a mine.

Few people realise how much the Australian contract mining industry today owes its early development to the unique tax-free status of the gold sector.

But there was no reason to limit the contracting of services to mining and stripping activities. For example, drilling, surveying, sample preparation, power generation and the provision of camp facilities and catering could all be supplied by contractors.

In fact, the whole business of maintaining a workforce on site changed. Often the limited lives of many of the new gold discoveries meant that companies could not afford to develop complete towns with all amenities to attract and retain their workforce if they were remote from a major town. Rather, many companies adopted fly-in fly-out as the basis of their operations, whereby, employees are flown in to work a roster of, say, two weeks on and one week off, or 9 days on and 5 days off. With 12-hour shifts, employees do little more than work, eat, shower and sleep. There is little time or energy for much else. Most personnel see such employment as a means of making good money quickly. It attracts those people who like or at least tolerate such a work routine.

Both contract mining and fly-in fly-out have had a significant impact not only in the gold sector but also in the wider resources industry. Additionally, they have had a beneficial effect on industrial relations from a management point of view. Certainly industrial action and militant unionism is less common than in the older style traditional mining towns with a static workforce.

However, the reasons for Australia’s huge increase in gold production went beyond higher gold prices, metallurgical improvements, the ease of financing new developments and the changes in work practices and industrial relations. Many of the technological changes which occurred over a wide range of the exploration, mining and engineering related fields are also covered in the book.

The exploration sector benefited in many ways. Better, cheaper and more sensitive methods of gold analysis were developed. The time consuming method of analysis by fire assay was supplemented by these other techniques. These included graphite furnace AAS or inductively coupled plasma optical (or atomic) emission spectrometry. In the late 1960s it cost about $20 a sample for a fire assay, or more than the equivalent of half an ounce of gold at the then price. Today, it costs fewer dollars for a sample to be analysed for eight elements with better reliability and sensitivity. Improvements in geochemistry, including the better understanding of the effects of weathering, as well as improved geophysical techniques also assisted the explorationist. Cheaper and better drilling techniques were another innovation, as was the widespread application of computers in all phases of exploration.

While there were no major breakthroughs as such in mining techniques, the proliferation of small to medium sized, steep-walled open pits allowed a rapid rise in gold production, particularly in the early years of the boom.

The design and construction of keenly priced gold processing plants by such local companies as Minproc, Como Engineers and Lycopodium was developed to a fine art and the book describes the growth of these engineering design and construction groups and the people involved. It was a case of continual improvement, with the design of each successive plant benefiting from the lessons learned on earlier projects. The large overseas counterparts such as Bechtel, Fluor and Davy McKee found they could not compete with the aggressive local groups that would design and construct plants in as little as six months and guarantee their performance, all at a fixed price. As one overseas metallurgist observed “...The Australians wanted to build the whole plant for what the South Africans built the gold room for.”

Gold production rose throughout the 1980s and by 1989 had reached just over 200 tonnes. The rate of increase slowed considerably between 1990 and 1995 so that annual production averaged about 245 tonnes over this period. However, on 1 January 1991, the gold industry had lost its tax-free status. Prior to this date, a number of companies had accelerated their projects to maximise profits and the impact of the new regime took some years to work its way through the system. Another contributing factor to the slowdown was the effect of the October 1987 stockmarket market crash and the consequent decline in gold exploration.

By the mid-1990s, output was on the rise once again and in 1997 Australian gold production reached its high point of 314 tonnes or just over 10 million ounces. Since then, with a reduction in exploration and with fewer discoveries being made, annual output has declined to 275 tonnes of gold for 2002.

As the Modern Boom progressed many companies became gold producers, as joint venturers or in their own right, while many of the small explorers joined the ranks of the producers. Initial size was no indication of eventual success as a gold producer, as shown in the profiles of some of the 400 or so companies mentioned in the book. Included are details of many of the old long-standing gold companies, as well as the emerging little Aussie battlers, the large local mining houses and the multi-national resource companies. By the early 1990s the development of many small, relatively short life operations led to a large number of companies claiming the status of gold producer. However, although production increased through much of the 1990s, the number of operations declined significantly due in part to the changes in the nature of the operations and the pressure to reduce costs.

Throughout the current boom there has always been considerable activity on the corporate side – takeovers, amalgamations and restructures are not just a recent feature of the industry. Some of the significant stories covered in the book include the activities of the Bond Group in the 1980s, which led the way for the consolidation of the Golden Mile, and the evolution of the Normandy Group to become Australia’s largest gold producer.

In the past five years, overseas control of the industry has increased markedly and the book tracks these changes. Some five years ago overseas companies controlled 20 per cent of Australia’s output. By mid 2001, the figure had risen to 30 per cent and thereafter the figure continued to escalate. Today, around 75 per cent of Australian gold production is controlled by overseas companies. While output has fallen during this period some 12 per cent from the 1997 peak, annual production is relatively stable at present.

Where will the gold industry be in five years’ time?

It is possible that output may decline further. On the other hand, projects such as Telfer, Boddington Deeps, Bendigo, Lake Cowal, Cadia East and Far East and a number of smaller “recycled” projects like Laverton, Mt Gibson and Charters Towers may boost production perhaps to a new high. Certainly, much will depend on the US dollar gold price and the US dollar/Australian dollar exchange rate.

Increased overseas ownership may mean larger exploration programs, with more money spent and a reversal of the decline in exploration that has been a concern for the last several years. This would most likely lead to further gold discoveries, increased output and more employment opportunities. We shall have to wait and see.

However, many of the decisions affecting the future of Australia’s gold industry are now made in Toronto, Denver, Johannesburg or London. What is beneficial for individual companies may not necessarily be beneficial for Australia. Has the Australian gold mining industry become a branch office operation? Are we becoming tenants in our own land? Despite the uncertainties such as land access, Australia has much to offer a gold miner or investor. The weak Australian dollar has been an attraction but Australia also offers geological prospectivity, low sovereign risk, safe surroundings and a healthy and well-trained workforce. These have been appreciated more from outside Australia than within it.

The Modern Gold Boom represents an extraordinary phase in Australia’s mining record – and it is not over yet.

© S E Close 2004

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