AngloGold's Ghana mine unsustainable

Accra - The cost structure at the AngloGold Ashanti [JSE:ANG] Ghana gold mine is unsustainable and the company is looking to make cuts to counter rising costs and falling production, Chief Executive Srinivasan Venkatakrishnan said on Monday.

Production costs per ounce have more than doubled since 2008 at Obuasi, which is Ghana's largest mine. A fall in gold prices this year has worsened the financial strain and the company's Ghana unit is relying on its parent company for funding.

"Obuasi is currently making losses at the operating level ... The current cost structure at the operation is clearly unsustainable," Venkatakrishnan told Reuters via email.

AngloGold Ashanti, Africa's biggest gold producer, swung to a loss in its second-quarter results issued this month.

AngloGold will spend $30m to $40m this year on a long-term plan to build a ramp to improve access to the ageing Obuasi mine and speed mechanization in a bid to raise production volumes and lower costs there.

"We are looking across the business at reducing costs and improving productivity by investing capital in the new ramp access," Venkatakrishnan said.

The mine's biggest expenses are payroll and electricity.

Venkatakrishnan said the company wants to eliminate wasteful expenditures and is also considering worker layoffs.

Ghana is the second largest gold producer in Africa and Obuasi is its most prominent mine. Mining is the top source of government revenue. The country exports gold, cocoa and oil.

"Government is very concerned about what is happening. They (AngloGold) came up with various options that are being considered and so we are waiting to hear what they intend to do," President John Mahama said in an interview on Monday.

Mahama urged mining companies to cut costs and employ more Ghanaians rather than expatriates. However he ruled out a reduction in corporate income tax on mining companies, which is currently fixed 35%.

Ghana's is aiming to reduce its budget deficit to 9% of GDP after it ballooned to 11.8% in 2012.

"When you are trying to cut a deficit, reducing corporate income taxes (on the mining sector) at this time is not an option that we will consider favourably," he said.

Ramp is crucial

Venkatakrishnan said Obuasi produced 58 000 ounces during the second quarter at a total cash cost of $1 560 per ounce. The spot gold price was $1 367.29 an ounce at 16:50 on Monday.

Obuasi produced 357 000 ounces at $633 per ounce in 2008 and 280 000 ounces at a total cash cost of $1 187 per ounce in 2012.

The company has a long-term mechanisation plan that will lead to layoffs but no fixed number has been settled on, he said in an email sent through the company's senior vice president for investor relations Stewart Bailey.

"Our ramp access plan is currently hitting its milestones and will be managed very closely. Essentially it must keep hitting these milestones in order to retain its ongoing access to capital from the group," Bailey said by email.

The Ghana Mineworkers' Union said AngloGold Ashanti notified it of 450 coming job losses out of a total workforce of more than 5 000 people, said senior union official Erik Gyima.

AngloGold merged with Ashanti Goldfields Corporation in 2004 but found maintaining the century-old mine cost more than expected, according to a former AngloGold executive.

"When we bought Ashanti the idea was that Obuasi had big potential but it needed big money. Anglo was going to put in the money to develop the potential. But Obuasi was more broken than people thought," said the executive who took part in the merger.