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Gold mines collapse

the Guardian (Tanzania)
July 21st, 2013

Will this be the end golden days in Tanzania as glitter of gold fades?
Geita Gold Mine

After years of super profits, Tanzania’s gold mining sector is facing a serious crisis as gold prices tumble down this week from a record $1900 to $1,277 per ounce at the beginning of this year.

As production costs at the African Barrick Gold (ABG) and Geita Gold Mine (GGM) remain high, the gold mining industry which enjoyed a boom from 2006 is now at the crossroads. Already, potential investors have shelved any plans of developing new mines following price falls at the global market.

ABG’s average production cost per ounce stands at $965, while that of GGM is quoted at $954 per ounce.

With the global investment bank, Goldman Sachs predicting further falls over the next couple of years as the more stable economic situation and higher real interest rates encouraged investors to seek returns elsewhere, it’s obvious the Tanzanian gold industry faces a collapse.

Even the growing popularity of gold as a wedding present in India, the biggest retail market for the precious metal, cannot stop the price tumbling further, according to the investment bank.

Analysts at Goldman said hints by the US Federal Reserve chairman Ben Bernanke that he is preparing to restrict the supply of cheap central bank funds has triggered a steep decline.

Goldman Sachs says the price would fall to around $1,050 an ounce by the end of next year. Last autumn gold fetched almost $1,800 an ounce, up from nearly $600 an ounce in 2006.

“If it reaches $1,050, we shall close the production or reduce operation cost by cutting down jobs and other cost,” a senior official from GGM told the Guardian on Sunday over the phone yesterday.

“When we planned our budget for 2013 we based on $1,800 price per ounce ... we didn’t see this disaster coming,” added the official who declined to be named because he isn’t the authorized spokesman for GGM.

No one from ABG was available to comment on the looming crisis.

Analysts say if the production figure especially production cost given by the gold mines are accurate then the industry will not survive if the price falls further to $1050.

How it all started

When the largest open-pit gold mine poured its first ounce in Tanzania’s Geita region, the price of gold per ounce stood at $350, but still the company, formally called Ashanti Gold Fields boasted of having found the most profitable mine.

That was July 2000, when Sam Jonah, former Chief Executive Officer of Ashanti Gold Field, told gatherings that Geita Gold Mine was going to be one of the most profitable mines in future even at the cost of $350 per ounce.

At that time, the production cost per ounce was estimated at $170, and this looked promising, forcing Ashanti to invest $160 million to construct Geita Gold Mine, which had the capacity to produce 600,000 ounces a year.

With a lifespan of about 20 years, Ashanti buoyed by projections that gold would surge to a record high of $600 in next few years, saw a profitable gold business in the Tanzania’s Lake Victoria gold Field.

As Ashanti mobilised resources to mine its new gold mine in Geita, the Canadian mining giant, Barrick Gold field was also building a goldmine empire in the same area by constructing Bulyanhulu Gold mine. Contrary to Geita Gold Mine, Bulyanhulu is an underground mine, whose operation cost is higher than open-pit ,ining.

Between 2000 and 2007, Anglo-Gold Ashanti and Barrick Gold (today known as African Barrick Gold) have established themselves in the gold mining industry, thanks to huge incentives granted by the Tanzanian government.

Henry Blodget summed it this way, “In the early 2000s, after drifting to a two-decade low below $300 an ounce, gold prices began to creep higher.

At first, those who had been seduced by gold in the prior 20 years only to have their hopes dashed remained skeptical. Gradually, however, as gold kept marching higher, they became believers.”

In 2007, came the big news that shook the mining industry: Gold price surged to a record high, reaching $700 per ounce, two times what it was in the end of 2000.

In the event, one analyst, wrote, “Gold's endless bear market was finally over,” the story went. “Gold would now resume its normal trend upward.

Gold, the only true "store of value" in a paper-money world, would increase its owners' wealth while stocks, bonds, real-estate, cash, and other popular asset classes destroyed it.

When the world was battling the global credit crunch in 2008, the value of paper money collapsed but gold prices soared, and those who had invested their fortunes in the shiny, permanent, coveted element inherited the earth.

By the end of 2008, gold reached the four-digits mark, as investors rushed to stock more gold as a form of insurance against the bleak future resulting from global economic crisis.

Buoyed by the huge demand in China and India, gold surged dramatically -- reaching $1900 by the end of last year, a 600 percent increment compared to the 2000 prices.

In Tanzania, it was boom to large and small scale investors, though to the common man on the street, it was just another day-dream of the world jammed with illusion and imagination.

As a result big players like Anglo and ABG invested close to over $4 billion in exploration, expansion and construction of new mines, hoping to make a huge profit, though production cost didn’t remain constant---they also grew steadily.

According to the Bank of Tanzania statistics a total of 38.1 metric tons of gold was exported in the year ending July 2010 compared with 29.1 tons exported in the same period last year. "The value of gold exports went up by 61.5% to $1,365.3 million, following a rise in the export volume as well as price in the world market," the bank said in a report, adding that during the year under review, international gold prices increased to an average of $1,112.9 per troy ounce compared with $873.1 per troy ounce recorded in the year ended July 2009.

By the end of 2012, the Central Bank of Tanzania stated that the value of gold export increased from a total of USD 1.496 billion to a total of $ 2.096 billion in Tanzania, a country that is currently ranked third along with Mali as the largest producer of gold in Africa.

By the end of last year, production cost per ounce in Tanzania’s gold industry also rose to an average of $900 depending on the type of the mine and availability of ore grade.

In April, this year, African Barrick Gold is on track to produce between 540,000 and 600,000 ounces of gold at cash costs of between $925 and $975 per ounce.

Geita gold Mine’s cost of production surged from $183 in 2003 to $954 per ounce by the end of 2012.

In 2012 gold production in Tanzania was 1.25 million ounces.

But in June, this year, came the biggest surprise: The massive fall of gold prices, which no one within the industry predicted.

Background

According to the Tanzania Chamber of Minerals and Energy (TCME), the mining sector now directly employs over 15,000 people, up from just 1,781 mining jobs in 1997 when the large-scale mining industry was making its first baby steps.

But, the contribution of the mining sector to the gross domestic product (GDP) increased remain very low at 3.5 percent in 2012.

Between 1997 and 2012, mining companies paid a total of $1.339 billion (Sh2.17 trillion) to the government in terms of royalties, statutory taxes and other contributions.

Mining companies also paid $713.122 million (Sh1.155 trillion ) for local salaries for their employees, while $40.94 million was invested in the training of Tanzanian employees.

Mining firms invested $50.8 million in corporate social responsibility and over $58 million in infrastructure development during the period under review (1997-2012).

But the other side of the story still cast a doubt on whether Tanzania as a nation has really benefited from the multibillion dollar industry.

The price of gold fell some $20 to $1,277 an ounce on Monday and Goldman Sachs predicted further falls over the next couple of years as the more stable economic situation and higher real interest rates encouraged investors to seek returns elsewhere.

Even the growing popularity of gold as a wedding present in India, the biggest retail market for the precious metal, cannot stop the price tumbling further according to the investment bank.

Analysts at Goldman said hints by the Federal Reserve chairman, Ben Bernanke, that he is preparing to restrict the supply of cheap central bank funds has triggered the steep decline.

"We expect that gold prices will decline further given our US economists' forecast for improving economic activity and a less accommodative monetary policy stance.

"We expect this decline in prices to coincide with rising jewellery/retail demand, which we view as price responsive and not price setting," it added.

The bank said the price would fall to around $1,050 an ounce by the end of next year. Last autumn gold fetched almost $1,800 an ounce, up from nearer $600 an ounce in 2006.

 

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