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Diggers and Dealers comes alive, as Aussie perfect storm rages

Diggers and Dealers comes alive, as Aussie perfect storm rages
Gold price and currency movements have created perfect conditions for Australian miners
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Diggers and Dealers comes alive, as Aussie perfect storm rages

 

Mining’s gang of international frequent flyers has diminished in number in recent years as money was sucked out of the market following the global financial crisis, and executives suddenly became aware that shareholders wanted them to travel economy.

Nevertheless, three international events do still command huge audiences.

The biggest is the Prospectors and Dealers Association of Canada conference in March; then there’s Indaba, London’s proxy event held in South Africa in February; in between is the Diggers & Dealers conference in Australia, held every August.

Of the three, Diggers & Dealers the only event that actually takes place in a genuine mining town. Toronto is a financial hub. Cape Town is a trading and tourism hub. But Kalgoorlie is located on the edge of Australia’s largest open cut gold mine.

That gives Diggers a flavour which the other events don’t have. The setting is more rough and rugged, accommodation harder to find, air conditioning is more rough and rugged, and catering to the extracurricular requirements of the largely male delegate list has become a little Australian sub-industry of its own.

There’s plenty of money at Diggers and Dealers, but an awful lot more of the hard living of mining too.

Still, putting the aesthetic or extracurricular proclivities of investors to one side, when all is said and done Diggers and Dealers this year looks likely to be the pick of the events calendar.

That’s because although in the northern hemisphere mining markets are currently attempting to stutter to a start like an old BMW on a frosty morning, in Australia the engine’s been on full throttle for many a month now.

Why? - two reasons. First, the Australian dollar has fallen against the US dollar markedly over the past five years. In 2011 a US dollar bought 91 Australian cents. These days, a US dollar in Australia will buy around A$1.30. And that feeds directly into the second reason, which is that after some steep falls since 2011, the gold price has turned around and is once more on the up.

Recent trades have been just shy of US$1,370 per ounce. And UK broker SP Angel this week spoke openly of forecasts of US$1,800 and higher. We’ve not heard talk like that for quite a while.

But with Australian dollars worth less and US dollars worth more, Aussie gold miners win both ways. Costs are incurred in the weaker currency. Sales are booked in the stronger one.

Win-win!

“There’s never been a better time to build or operate a gold mine in Australia,” Duncan Hughes from Somers & Partners said this week. But he hastened to emphasise that in this he was merely echoing statements made at the 2016 Diggers & Dealers conference by Allan Kelly of Doray Mining (ASX:DRM) and Michael Erickson of AngloGold Ashanti (NYSE:AU).  

Erickson in particular was interesting on the subject, as Anglo’s jointly-held Tropicana mine is one of the bigger Australian gold projects to come on stream in recent years. “The stars are aligned for Australian producers,” he said at the beginning of his presentation.

After talking briefly about the global context and the near-record ETF inflows that markets have seen this year, he then showed a slide with a bland enough title: Currency Leverage.

Bland it may have been, but it spoke of hard cash: for every US$10 move in oil, there’s a corresponding US$8 per ounce effect on cash costs, said Erickson. And for every 1% move in currencies there is a US$6 per ounce effect on cash costs.

Now, cast your mind back to 2011 again.

In 2011, the oil price was peaking at just over US$120 per barrel, as opposed to the US$40-odd it trades at now. So that’s a US$64 reduction to cash costs right there. More significant, though, is the currency effect. Over the same period the Australian dollar has fallen by around more than 30%. That rounds out at a back-of-the-envelope US$180 per ounce.

Add the two together and a chunky US$240-odd has been cut from mining production costs before the jackhammers even crank up in the morning. Ladle on a resurgent gold price and it’s hardly surprising that Diggers & Dealers this year has that certain type of buzz and hum that’s been missing from other international mining conferences since about 2008.

 

 

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