Gold Mine Production down but costs up 24% Worldwide

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". . .producers remain 'firmly bullish' and. . .de-hedging is expected to continue in the first half of 2009."

The second interim update for GFMS Ltd.'s annual Gold Survey carries its usual comprehensive market assessment including an in-depth analysis of the mining sector. The analysis records a provisional fall in production for the year of 88 tons, with a large majority of the reduction taking place in the first half of the year. Producers' total cash costs rose by 22% year-on-year to an average of $472/ounce for the nine months of 2008, while total production costs were also up by 22% at $591/ounce. The figures for the third quarter of 2008 alone record an increase of 25% year-on-year in cash costs and a 24% in production costs.

These figures, which are based on primary gold mine production and are in accord with the Gold Institute reporting standard, show a cash margin in the third quarter of the year of $365/ounce, up from a margin of $276 in the third quarter of the previous year—but almost equal to the margin enjoyed in the final quarter of 2007, as gold prices increased by almost $100 between the third and fourth quarters of that year.

Mine de-hedging reached a provisional full year level of 346 tons, compared with 447 tons in 2007 and an average of 282 tons per annum from 2000 and 2007 inclusive (net de-hedging started in 2000). The majority of the changes took place in the first half of the year and GFMS estimates that the global hedge book at end-2008 stood at below 500 tons, which represents a 20-year low—though there is still the scope for a substantial revision to this figure given that producers' fourth-quarter reports have yet to be published and there is always the possibly of unscheduled deliveries against a hedge program.

The study of the completion of the delta-adjusted hedge book concludes that the spilt between forwards and options was similar at the end of the third quarter to that at the start of the year, with roughly 70% in forwards and 30% in options, compared with 68% and 32%, respectively, at the start of the year.

The study points out that while neither investors nor management may view hedging with much favor, the prevailing economic environment may render it necessary as counterparties protect themselves against risk. It also notes that producers remain "firmly bullish" and that de-hedging is expected to continue in the first half of 2009, even though the rate may not reach that of the first half of 2008.

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