Spot gold has fallen about 20% during the past year, including an almost 9%, or $US125, decline last week to about $US1348, but it has since begun to retrace losses, moving up 2.3% yesterday to $US1465.
Declining or flat commodity prices have prompted industrial metal miners across the world to defer billions of dollars of projects, with the precious metal sector similarly coming under increased pressure to scale back, defer or postpone exploration or expansion.
Some of the larger, financially prudent producers will likely be eyeing cash-strapped projects for merger and acquisition plays as funding for resource investment dries up.
While Oceana Gold in East Otago and Newmont at Waihi in the central North Island have been reaping the benefits of a strong gold price, unhedged and selling directly to the spot market, that has been during a period of escalating production costs which was masked by the high prices.
Oceana's 2012 cash cost to produce each ounce was $US940 for 2012 compared with $US875 for 2011, while its fourth-quarter cost came in at $US638.
Craigs Investment Partners broker Peter McIntyre said the $US125 gold plunge was a ''once-in-a-generation move'', saying 12 years of gains were at an end - having hit $US1920 in late 2011, but more recently trading above $US1500.
''2013 will likely mark the first year gold has posted negative annual returns since 2000. What was a reliable source of positive returns during the past 12 years has ended,'' he said.
Forces which had previously ''powered gold higher'' during the last decade were now working in reverse, he said.
The initial drivers had been the collapse in real interest rates, rising risks in US equities, a weakened US dollar downtrend, de-hedging by gold producers and more co-ordinated European central bank gold sales. Oceana's revenue for calendar 2012 was $US385.4 million, slightly lower than 2011's revenue of $395.6 million, due to fewer ounces produced and sold. The company said that was partly offset by higher average gold prices received in 2012 of $US1675, compared with $US1587 during 2011.
In the North Island, Newmont Waihi Gold reported revenues of $214 million in 2011, and made a profit of $5.4 million from producing about 100,000oz of gold and about 750,000oz of silver annually. Globally, Newmont's 2012 cash costs to produce about 5 million ounces averaged out at $US677 per ounce, while consolidated New Zealand and Australian operations were in a $US900-$US1000 range.
Mr McIntyre said if gold was aligned with historical averages, compared with copper, its price would be about $US1050, which would be ''untenable'' for gold producers.
Working in Oceana's favour will be commercial copper production, due to hit its balance sheet towards the end of the year, from its recently commissioned Didipio gold and copper mine in the Philippines' northern island of Luzon. The copper sales are expected to dilute the overall cost of gold production, in New Zealand and the Philippines, and deliver a competitive and profitable edge to production costs.
Mr McIntyre said Oceana would have a competitive advantage, being able to sell copper to offset gold-production costs, but noted copper was down more than 10% on a year ago at $US7088 per tonne.
There were large copper inventories being built around the world, plus a general oversupply, and Oceana would have to sell on the spot market, but exactly how much its copper sales would offset gold costs was unknown, he said.
While larger companies may face declining profit margins, they are better placed in the short term to ride out the declines, but exploration funds are likely to begin drying up for smaller exploration companies.
Mr McIntyre said small explorers could be facing hard times to raise capital, as it was ''dubious'' the risk-aware investors attracted to the mining-friendly Toronto stock five years ago were still to be found, given gold's recent plunge.
The strength of the New Zealand dollar continued to work against local investors, as when translated from US to kiwi dollars, gold became only an ''average investment'', he said.
A recent Australian report by consultants PwC said mining companies should be focusing on improving productivity, rather than just digging up bigger volumes of minerals. Based on Australian Bureau of Statistics data, PwC said the output of minerals per hour worked in the sector fell by 56% between 2001-02 and 2011-12, while use of capital assets became 44% less productive.
PwC said it was important to note the ABS figures were influenced by work done in the construction phase of mining, before the production of minerals began.
The report found the industry's focus on productivity had intensified during the past year.
''Softer commodity prices and a persistently high Australian dollar have been the catalysts of action in the mining industry,'' it said.
This had swung the emphasis away from simply increasing output to honing productivity.
''Headcount reductions, the postponement of major projects and changes to senior leadership in the major miners are reflective of a marked switch away from a volume growth mentality to a cost and productivity focus.''
- Additional reporting: Reuters.
