JOHANNESBURG (Business Day) -- The recent skip accident at gold miner Western Areas [JSE:WAR], which owns half of the South Deep mine, had reduced the mine's gold production by 35% in the June quarter compared with the March quarter, it said yesterday.
"There are a number of issues that relate to that - part of that is production, and that's why these results are particularly poor," said Western Areas Chairperson Gill Marcus.
On May 4 a skip and its rope fell down Western Areas' main shaft causing extensive damage to infrastructure. Management warned that gold production would be halved for nine to 12 months while the damage was repaired.
The incident occurred at a crucial time for Western Areas. Its previous management sold substantial amounts of future gold production at prices substantially lower than today's. Ramping up production was key to reducing this liability.
"The plus side is that looks as if it's going well, and we're looking at early 2007 to be recommissioned," said Marcus. "The repairs are very well underway - the R450 million ($66.1 million) is all of our anticipated costs until we come back into production, and that's in place."
However, Marcus said that it's early to give a date because the approach to South Deep is that we are very careful on safety issues, and secondly the alignment of the hoisting capacity in the shaft.
"That's obviously a long-term question so there are no short cuts in that regard - it's got to be a thorough first-class job. We are looking at coming in ahead of time we hope - we are looking at the early part of next year," Marcus added. In the June quarter Western Areas produced 35,232 ounces of gold at a cash cost of $602/oz compared with 53973 ounces at a cash cost of $422/oz in the March quarter.
Western Areas realised an average gold price of $285/oz because of the hedge book, compared with the average spot price of $605/oz. In the June quarter 92.5% of the gold produced was sold into the derivative structure compared with 61% in March.
A quarterly headline loss of 216.6 cents a share was made compared with the previous quarter's loss of 13.4 cents a share.
Marcus said the Western Areas issues are influenced predominantly by the hedge position. The total cost of the hedge at this point "if we had to settle it" would be about R2.7 billion ($396.8 million).
According to Marcus, in the first quarter, 61% of production had to go to feed the hedge - in the second quarter it was 92%.
"For Western Areas if one strips out the issues that are impacted on by the hedge, the loss position is about R40 million ($5.8 million)."
Marcus said if shaft incident had not occurred for the balance of this year Western Areas would have been anticipating about 51% or 52% of production, declining over the next two years to about 35% of production.
"So production is crucial to the ability to address the issues of the hedge," added Marcus. With Classic Business Day.
