By Kitco News

Monday May 30, 2016 12:55

(Kitco News) - Seasonal factors pushed Australian gold production down in the first quarter of 2016; however, producers are still benefiting as prices pushed above $1,700 an ounce, according to data compiled by mining consultants Surbiton Associates.

In a report released Sunday, the firm said that Australian gold production totaled 71 tonnes in the first three months of the year, down about 2% from the fourth quarter of 2015. On an annual basis, however, production was up 4% compared to the first quarter of last year.

Surbiton’s Dr. Sandra Close said that gold production is seasonally lower in the first quarter; however, this could be a new trend as companies target lower grade ore.

“Reasons for this include disruption due to wet weather in the cyclone season, the fewer number of days in the March quarter and the New Year holiday period,” she said.

Another factor that has lowered production in the world’s second largest gold producing country is the fact that companies are starting to process lower grade ore because of higher gold prices. The average closing price for spot gold in Australian dollars was $1,637.42 an ounce, up more than 5.6% from the average closing price seen in the first quarter of 2015.

In early February, gold priced in Australian dollars hit a high of around $1,750 an ounce, just down from its all-time high of $1,800 in 2011.

“As the gold price in Australian dollar terms has increased, due a recovery in the U.S. dollar price of gold and a weakening of the Australian dollar. Many mine operators have the flexibility to trim their grades and still make a reasonable profit,” said Close. “The Australian gold mining sector is very sensitive to the grade of ore being treated. If the overall grade is reduced by just a fraction of a gram per tonne, it will reduce the total gold output by several tonnes.”

Close said that with Australian gold prices at current levels they would expect to see continued lower ore production, which would continue to impact output for the rest of the year, similar to the trend that was seen from 2005 to 2012 as prices climbed.

Another result of a higher gold price, the firm highlighted, was increased hedging from Australian gold producers. Close explained that some companies are selling their future production through options and futures contracts.

“At last more and more now realize that selling part of their gold output forward or using options are legitimate and rational means of risk management and of securing future revenues,” she said. “Some of these contracts guarantee that the companies will receive prices as high as $1,778 per ounce, as far out as mid-2019.”

Australia’s largest gold producers in the first quarter of 2016 were:

By Neils Christensen of Kitco News; nchristensen@kitco.com