PERTH (miningweekly.com) – Australian gold miners would survive the current depression in the gold market, gold mining consultancy Surbiton Associates said this week.

Surbiton director Dr Sandra Close noted that the gold mining sector would continue to be a significant contributor to Australian mineral exports, with the company currently being the second-largest gold-producing country, behind China.

During 2012, Australian gold production totalled 225 000 t, or some 8.2-million ounces, which Close noted, even at the current low prices, would be worth around A$11-billion.

“There have been many reports in the media in the past few days about possible mine closures, job losses and general doom and gloom. If low gold prices persist, gold producers will certainly have to make adjustments but mining is a long-term business and you can’t just turn it on and off like a tap,” she said.

The gold price has been weakening slowly since it hit a peak of $1 895/oz in early September 2011. Close noted that the price decline gathered pace late last week with gold falling to around $1 330/oz on Tuesday.

Heavy selling from the gold exchange-traded funds compounded the price slide as panic selling triggered stop-loss orders and the selling frenzy began to feed on itself. The gold price has since recovered somewhat.

Close said it was "much too simplistic" to look at a list of the local gold producers and their cash costs of production and, on that basis alone, speculate on which might survive and which might not.

“There are many other factors which investors should take into account rather than make rash decisions.”

Production costs have been rising in the industry with some commentators describing them as ‘being out of control’, she added.

“What they fail to take into account is that, over the past decade, producers have deliberately lowered their gold ore grades as the gold price has risen. This has had the effect of increasing their cash costs of production and reducing the amount of gold they produced each period.”

She said many gold mining companies could adjust the gold content of ore being processed by blending lower-grade stockpiled material along with their run-of-mine ore. In this way, operations remained profitable, while optimising the life of the mine and extracting as much gold from the deposit as possible.

“If gold prices remain low, the process can often be reversed. This results in less low-grade material being processed, with gold grades increasing and cash costs being reduced.

“A rather unexpected side effect of this scenario is that gold mines with the flexibility to increase their head grade may actually produce more gold when prices are lower,” she said.

Close noted that a lower price regime would increase the likelihood of gold producers returning to various methods of hedging their gold output. These range from a simple forward sale of gold at a fixed price, to the use of put options and other more exotic gold selling mechanisms.

A further effect of a lower gold price regime would be a reduction in gold exploration expenditure, which would be reflected in reduced exploration programmes, lower drilling activity and job losses in the industry.

“Exploration budgets will be cut if gold prices remain low. It is an easy, rapid cost-cutting measure but means unemployment for some exploration geologists, field assistants, drillers, suppliers and the like. Reduced exploration would [also] mean less likelihood of new discoveries and this would be detrimental to the industry in the longer term.”