Analysis: Record margins and bustling cash and bullion balances have Western Australia’s goldminers up and about, but labour pressures and inflation are appearing on the radar.
Analysis: Record margins and bustling cash and bullion balances have Western Australia’s goldminers up and about, but labour pressures and inflation are appearing on the radar.
The line reeled out by Northern Star Resources chief executive Stuart Tonkin on the labour force pressures felt by his company – the state’s largest goldminer – has changed dramatically in 12 months.
Around a year ago, things appeared rosy on this front.
On an investor call to report Northern Star’s June quarter results, Mr Tonkin said as much.
With nickel prices – and projects – crashing and the nascent lithium sector on the wane, a gold industry enjoying a strong price run suddenly had access to a labour pool previously constrained.
“It’s sad to say, we’re beneficiaries of that retraction,” Mr Tonkin said of nickel’s challenges in July 2024.
“But it also was unique that all the cycles peaked at once, with two years of border locked, that we had iron firing, lithium firing, nickel firing and gold firing all at the same time, with inability to get imported labour.
“The state was short 25,000 resource workers – that’s why you got cost escalation.
“This is the opposite side of that hill.”
Much has changed over the 12 months since, leading the price of gold to unprecedented heights.
The dramatic election of Donald Trump as US president for the second time, and his subsequent approach to economic policy, has conflated a complicated geopolitical climate and sent the yellow metal soaring to prices unimaginable to even the sector’s biggest bulls.
Long-standing Ramelius Resources boss Mark Zeptner told Business News last month that he had never envisaged an Australian dollar gold price above $3,000 per ounce.
The price is currently above $5,200/oz.
The bulk of the Western Australian gold sector produces from mines that are economic at prices in the $2,000s, and their bank balances are flush with cash.
With the cash has come a push to expand production at a cost of billions, detailed in Business News’ gold feature published in print in July.
All commodities boom at some point, but few rush like gold.
Northern Star is leading the push, with an outlay of $1.5 billion on an enormous mill expansion at KCGM which will lift its capacity to 27 million tonnes per annum in the years ahead.
It has also forecast cost inflation in the current financial year, of around 5 per cent.
Speaking at KCGM over the weekend, Mr Tonkin revisited his 2024 observation on the labour shortage.
“We haven’t really seen the relief that was expected when nickel and lithium projects were paused or wound down,” he admitted.
“If anything, gold has picked that up and some, and so that’s just added to the pressure.
“On a lock-box like Kalgoorlie-Boulder, you see more pressure on that fixed workforce, which hence turns to the fly-in, fly-out arrangement for temporary additional labour.”
FIFO comes with its own costs, and Northern Star plans to deliver 1,100 mining camp beds across two facilities in the years ahead to support its growth.
Northern Star is not alone in its heightened labour force awareness.
In the lead-up to Diggers, Mr Zeptner told Business News that Ramelius – as it works towards a scale up of its production following its Spartan Resources acquisition – saw a labour squeeze coming.
Mr Zeptner elaborated on his point at this year’s mining forum, telling a media conference that wage growth was expected to land between four and five per cent this year, up from three last year.
“Everyone in the gold space seems to be either expanding their projects or restarting projects, and we’re the same We’re expanding, building new projects,” he said.
“I think there’s potentially a bit of stress coming into the labour market.”
Mr Zeptner doesn’t expect inflationary pressure to tick up to double digits as it has in the past, but said it was a factor in Ramelius’ plans.
Another of its scaling-up peers is considering evasive action of its own.
Vault Minerals corporate development officer Len Eldridge said his company was weighing up its operator model options, between contractor and owner-operator.
Vault recently entered a new mining services contract arrangement at its Deflector mine, noting in its June quarterly report that the project’s costs would rise as a result.
The company – created out of the Silver Lake-Red 5 merger of 2024,
Mr Eldridge said the tendering process at Deflector had led it to reassess its operating models.
“Increasing costs aren’t necessarily inflation, if you’re getting productivity growth. That’s the buzzword, I guess, in business today, its productivity growth,” he said.
“We’re not seeing that.
“If you’re not getting the benefit from a contractor, yet you’re seeing the cost pressures there, can we do it better ourselves?
“Do we have the assets that we can bring them into a business to give them an opportunity for a five-year [mine] life?
“That’s kind of how we see the world.”
The quarterly noted that while Deflector had limited mine life remaining, the company’s other mines were longer life and could lead it to pursue other models at the end of existing contracts.
The wage issue has emerged alongside power supply as one of the major cost driver.
A flurry of activity to capitalise could sting, should prices retreat and margins close.
The executive director and deputy chair of broker Argonaut, Liam Twigger, told Business News that labour was particularly tight in Australia’s gold heartland.
“Labour is incredibly tight,” he said.
“That’s the number one thing in the Goldfields, and in fact, any job in Australia – but particularly in the Goldfields it’s getting good people.
“It’s really hard, and it’s very competitive, and labour costs are going up.
“You’re just lucky at the moment that the gold price is so high.
“I mean, the average all-in sustaining cost is around two thousand to two thousand, one hundred dollars an ounce, with a spot of five thousand.
“It’s a massive margin.”
Margin call
Commodity prices are prone to sharp retractions, as shown in the nickel market, and gold would have some way to fall from the record highs the commodity has enjoyed of recent years.
In a rising cost environment, that would be a major blow.
But the drivers of gold’s surge show no signs of letting up, according to Mr Twigger.
Mr Twigger said the election of Mr Trump, and his approach to leadership in his second term of office, may have created structural change for gold pricing globally.
“He’s changed the landscape,” he said of Mr Trump.
“The US dollar is weak, and I think it’s on a downward trajectory. If the US dollar is weakening, then you lose money on it – so as a result, we’re seeing a big buy up in gold.
“Central banks are existing US dollars and buying gold.”
Mr Twigger does not expect the gold margins to come off in the years ahead – forecasting growth in the price beyond the current highs which have led to so much activity in the sector.
He expects to see a spot price of $6,000 per ounce by the end of 2025 and forecast sustained high gold prices for a decade to come.
“I think there’s so much uncertainty in the world,” Mr Twigger said.
“You can argue that we’re on the brink of the Third World War – you’ve got Russia, China, possibly India now, Iran and North Korea in one camp, and then you’ve got the US and the Western world in the other.
“We’re already fighting this proxy war in Ukraine.
“You’ve got to be careful what you wish for.”
Should price increases continue gold producer maintain a handle on costs, the margins for unhedged production would only stand to grow.
Then comes the question of how to grow to capitalise on said margins.
Merger and acquisition activity has been high in the gold sector in recent years, particularly in the middle tier, as companies seek to consolidate.
But with the gold price high, some – like Evolution Mining – are opting out of the M&A market all-together.
Others are more bullish, with a spate of all-scrip deals over the past 12 months getting the job done without a need for cash to change hands.
Mr Twigger said he hoped to see a flow on from the current mid-tier of gold, selling lower-level assets out of their portfolios as they climb the production ladder, and investing in exploration alongside smaller companies.
“There’s such an important part of the ecosystem having good, solid juniors down there, but there’s no love for them,” he said.
“It might be a case of the value ultimately trickling down from the producers to the developers to the explorers, and you can start to wait for that to happen.
“But I think any junior with a good project and a good idea, should target some of the majors that now have cash balances.”
Mr Twigger said he also expected to see dividend campaigns ramp up within the majors.
