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Drop in gold price may affect mining companies in Sierra Leone

Drop in gold price may affect mining companies in Sierra Leone

The current drop in prices for gold around the world is a cause for concern for gold exploration companies in Sierra Leone, including Amara Mining (Cluff Gold) and Polo Resources (Nimini Holdings Limited).   (Photo: Country Manager of Amara Mining’s subsidiary in Sierra Leone, Cluff Gold SL, Alusine Jalloh )

The two gold exploration companies are currently negotiating with the Government of Sierra Leone, for the commencement of mining operations, but the fall in gold prices may seriously affect their investment plans.

Exploration companies have less flexibility than their producing peers as they are faced with the choice of continuing work or conserving cash. Many seem to be opting to press on with their current exploration plans and completing studies that are underway, with a view to moving into a period of effective hibernation once the current phase of work is completed.

A number of companies, such as Aureus Mining, which is developing Liberia’s first gold mine, New Liberty, and Asanko Gold, which is developing the Esaase project in Ghana, are now at the point where they need to secure debt, however as yet very few have secured a final debt package.

For gold miners who need to raise money to finance new projects, options will be limited. In an interview with Bloomberg News, Tyler Broda, a gold analyst with Nomura Securities in London, said that companies in Africa will be particularly hard hit:

“Companies relying on a single asset and those in Africa, already struggling with deteriorating geopolitical risk over the past year, will find it more difficult to convince banks to fund projects.”

Broda predicts that gold could fall as low as US$1,000 per ounce in 2013, and with the average all-in cost for the industry at approximately US$1,200 per ounce, the impact on the gold industry could be far reaching.

Gold came under pressure again earlier in May, hitting a two-month low as financial investors continued to liquidate their holdings. After the yellow metal dropped in April to the two-year low of $1,321 an ounce, the subsequent $160 rally over the next two weeks had bullion bulls talking of a “capitulation” that put in a bottom. But that bounce now looks like it was just “filling the gap”, quite a common occurrence after such sharp moves in either direction.

The relapse comes as investors pull money out of gold funds. The firm dollar and weak inflation are taking a toll, and physical buying by consumers attracted by the lower price may be only slowing the decline.

There have also been production cuts, with Canadian gold producer Semafo Inc. placing its Samira Hill mine in Niger on care and maintenance and London-listed African Barrick Gold closing the Tulawaka mine in Tanzania in response to lower prices. This could be just the start of a process of adaptation that the industry will have to go through to survive in a weaker gold environment.

In a recent gold sector note, Eugene King, a mining analyst at Goldman Sachs in London, believes that the gold price will fall further still and as a result, the gold mining industry will contract by 10% over the next two years:

“As we believe that there is no cost support in gold mining, when the price settles we would expect the miners with high-cost mines to reduce unit costs through high-grading (where possible), or by cutting operating costs and capex to stay in business. If this cannot be done, then we would expect these mines to put on care and maintenance. We expect c.280 tonnes (c.10%) of mining capacity to have total cash costs above our gold price forecast, and hence to be under threat of closure.”

The Country Manager of Amara Mining’s subsidiary in Sierra Leone, Cluff Gold SL, Alusine Jalloh, when contacted on the impact this would have on his company has this to say; “we are not working in isolation in Sierra Leone as gold is a global phenomenon. Thus Cluff Gold SL like other players all over the world is closely monitoring the trend. As for our negotiations with government we would go ahead as we fortunately have a “listening” government that we are sure would consider all factors that are put on the table for a win-win outcome”.

He sounded optimistic about the rebound of gold; though with the free-fall of  prices we are a bit skeptical.

Submitted by Saidu Bah

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