TORONTO (miningweekly.com) – One of the most critical elements the global gold mining industry is not getting right is replacing mined ‘quality ounces’ with same-quality ounces, which is one of the simplest ways to keep operating costs low and maintain margins, Africa-focused Randgold Resources CEO Mark Bristow told a group of analysts and investors in Toronto on Friday.

He said the global gold industry was in a “terrible state”, pointing to the fact that Randgold was one of the only significant gold miners that had kept, and increased, its stock value over the past several years, fluctuating closely in tune with the gold price.

Looking at the global gold-mining scene over the past several years, there had been, on average, consistent gold output, and a significant step up in the gold price, Bristow said, noting that one would have expected that some of the gold miners would have made a lot of money. But, that was in fact, not the case.

“When one looks at the performance of the gold stocks, most gold stocks are trading below the price that they’ve traded at in July, 2002,” he said, adding that Randgold was one of the few exceptions.

In comparison, Randgold’s Nasdaq-listed shares had risen from just over $3 a share at that time, to more than $70 apiece on Friday, an increase of more than 2 000%. Over the same time span, Barrick Gold’s NYSE-listed stock had risen about 16% to $16.49 apiece, and that of Goldcorp had increased 170% to $22.46 apiece.

LACKING EXPLORATION

Bristow charged that the industry had not replaced the ounces it had mined.

“In fact, in the past 12 years, we’ve not even replaced 50%. This is a very serious situation and no one has identified this,” he said.

Bristow took a hit at analysts who, at the end of 2012, had criticised Randgold for the fact that it had not materially increased its reserves, but kept the grades the same.

“Everyone got on this bandwagon, and no one understood the impact of just adding reserves at a higher gold price.”

He explained that quality had to be replaced with quality, otherwise the grade comes down, and unlike the boom times of 1999/2000, "the industry is bust today", lacking the increased capital costs involved in mining lower grades.

“It’s completely broke, and the only way it can fix itself is to look at getting the reserves up the grade curve. It’s going to result in some very tough decisions,” he said.

SUPPLYING AT A LOSS

Bristow added that Randgold had been researching a trend - watching the gold industry supplying gold at a loss.

“During the last quarter, miners reported ‘improved’ results, but no one looked at the increasing debt levels. The gold industry produced more gold in the last quarter, at a higher loss than it has ever done in its history, while everyone thinks it is turning around,” he warned.

Bristow said the global gold industry on average calculated reserves at $1 400/oz at the start of the year, and this had resulted in most companies not making money at a price of about $1 250/oz.

On Friday, spot gold was trading at $1 151.90/oz.

Meanwhile, Bristow noted that the basket of input costs had risen on average by 150%, when compared with 2002. The gold price had also risen about 400% over this period, but he pointed out that the profit was not on the balance sheets, because of the generally falling grades.

“One could cut capital, exploration and general and administrative costs, but it does not change the underlying profitability of a tonne of rock. The only thing that affects base costs in the mining industry is the grade,” he stressed.

PREVIOUS SUCCESS

Bristow said Randgold would pursue its aggressive exploration strategy through 2014, as he believed it was the only true way for gold miners to create "real" value.

The company has a strong track record of discovering, developing and operating gold mines, with five multimillion-ounce discoveries – four of which had already been developed into mines.

These included the 7.5-million-ounce Morila deposit, in southern Mali; the 7-million-ounce Yalea deposit and the 5.5-million-ounce Gounkoto deposit, in western Mali; the 4-million-ounce Tongon deposit, in Côte d'Ivoire; and the 3-million-ounce Massawa deposit, in eastern Senegal.

Randgold financed and built the Morila mine, which, since October 2000, had produced more than six-million ounces of gold and had distributed more than $2-billion to stakeholders. It had also financed and built the Loulo operation, which started as two openpit mines in November 2005. Since then, two underground mines had been developed at the Yalea and Gara deposits.

The company’s Tongon mine, in Côte d’Ivoire, poured its first gold in November 2010. Gounkoto, south of Loulo, delivered first ore to the Loulo plant in June 2011, and paid its first dividend to shareholders in mid-2012, 30 months after drilling the first discovery borehole.

In 2009, the company acquired a 45% interest in the Kibali project in the Democratic Republic of Congo (DRC), which stood at 11.6-million ounces of mineral reserves and was one of the largest undeveloped gold deposits in Africa.

Kibali, which Randgold developed and is now operating, poured its first gold from its openpit operation in September. Completing the plant and an underground mine were still under way.

Randgold also had a significant project at Massawa, in Senegal, and an extensive portfolio of organic growth prospects, supported by intensive exploration programmes in Côte d’Ivoire, DRC, Mali and Senegal. New joint ventures (JVs) in the DRC and Senegal had expanded Randgold’s footprint in these regions.

Bristow on Friday hinted that another announcement of a new JV with a junior was imminent, quipping that Randgold was having a “field day” with the Africa-focused juniors regarding earn-in agreements. It had already inked three earn-in agreements with cash-strapped juniors this year.