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Chairman's Report

Chairman's Report from Gympie Gold's 2003 Annual Report

THE 2002-03 YEAR

The year ended 30 June 2003 was a most disappointing year for the Company. The net loss of $22.9 million reflects this. Six months of production problems at Southland Coal had a severe effect on the Company's profitability and balance sheet. Southland has been back in full production since March 2003, but some of the consequences of the problem period, particularly the balance sheet constraints, will continue to influence the current year.

The problems at Southland arose from difficult ground conditions encountered in September 2002 and which persisted until mid-February 2003. In that period only about 250,000 tonnes of coal were produced, a shortfall of 350,000 tonnes and $20 million on budgeted saleable coal, and extra costs were incurred to fix the problems. The episode cost the Company about $25 million.

Since March 2003, Southland has been in full production and the sort of difficulties experienced are not expected to recur. Extensive corrective measures were taken, including the purchase of a near-new longwall to replace a section of the existing longwall unit when it is moved to the next panel in September 2003. Coal production since the beginning of March has averaged 192,000 tonnes per month which equates to about 2 million tonnes per year, after allowing time for a longwall move.

As a result of the problems at Southland the Company needed to rebuild the balance sheet where contingency reserves had been almost exhausted. Share placements and a Share Purchase Plan raised $15.2 million during the June 2003 quarter. Some restructuring of loan arrangements also occurred and a major target for the current year is to restructure the duration of loan facilities.

The problems at Southland overshadowed achievements at Gympie Eldorado, particularly some exciting exploration results.

Gold operations were slightly below budget due to the grade from a particular Stockwork zone being lower than forecast. In addition, near-mine exploration was disappointing in that it failed to find large ore zones that could be brought into production quickly from the Lewis Decline. However, overall exploration success was significant and added greatly to the prospectivity of the whole Gympie Goldfield. Of particular importance was the identification of Goldfield extensions to the prolific Inglewood Structure to the north and south.

In our view the evidence continues to build that the Gympie Goldfield has the potential to deliver more gold in the future than the 4 million ounces it already has produced. The mining operation will remain small until exploration results trigger expansion using the infrastructure that has been established.

OUTLOOK FOR 2003-04

The markets for our two key products look reasonably sound in the coming year.

Coking coal prices have been supported worldwide by the enormous demand for steel coming from China. This in turn has been driving both the Japanese and Korean steel industries which are working at full capacity. Coking coal is therefore in a different market situation from thermal coal where excess production has been evident. The negative for Australian coking coal producers has been a stronger Australian dollar which has taken the shine off the price received in local currency terms.

Southland has the great benefit of having a niche coking coal with extremely high-fluidity and very low ash. This opens up a universe of marketing and coal blending opportunities which we have been actively pursuing. From being essentially a coal sold only to a few Japanese customers several years ago, Southland, under the ownership of Gympie Gold, has now opened markets all over the world. This has allowed us to defend price and maximise the value-adding role for our coal. In addition, we have hedged the Australian dollar receipts for about 50% of expected revenues in the next eighteen months at a value of US 62 cents to the Australian dollar.

The gold price outlook is, in our view, excellent. It seems the volatility in world currency markets, particularly the weakening US dollar, has resulted in new life for gold which, only a short time ago, was being written off as a barbaric relic. Gold is being viewed again as a serious asset class for investors. I expect this trend to continue.

As a consequence of this view, gold hedging commitments were reduced by 94,000 ounces during 2002-03. Forward sales totalled 126,000 ounces at 30 June 2003, equivalent to about half of gold production over the next four years at current production rates or approximately 20% of current resources.

PRIORITIES FOR 2003-04

The key priorities we have set for the Company over this year are designed to restore its growth momentum and re-kindle market support.

  1. To achieve production at Southland of 1.8 to 2.2 million tonnes and tightly control the costs of production to expand operating margins.
  2. To follow-up on last year's advances in exploring the Gympie Goldfield in order to add further to existing resources and enhance the prospectivity of the whole Goldfield.
  3. To continue the process of strengthening the corporate balance sheet by reducing and restructuring existing short-term loans and by fine-tuning hedging arrangements for both currency and gold.
  4. To extend the Gympie Gold Gemstone business into new markets and downstream into the Gympie Gold Jewellery Collection, as well as increasing the supply of gemstone from the mine.

We are actively pursuing these objectives and achieving improvements in all these areas. As we report progress during the year, I hope shareholders will be increasingly confident that the Company is back on track. The reduction in the market value of Gympie Gold shares has been one of the most painful results of the problems of the last year. As a large shareholder, no-one feels this more deeply than I do. I would hope over the coming year that as the market sees that the Company is achieving its objectives that this will lead to stronger support for the Gympie Gold shares and higher prices.

D'AGUILAR GOLD LIMITED

Gympie Gold has helped and encouraged D'Aguilar Gold Limited to raise funds to explore tenements around the Gympie Goldfield. Some of our regional tenements were sold to D'Aguilar, particularly those tenements prospective for gold-copper deposits which are that Company's primary exploration target.

Gympie Gold shareholders were offered the opportunity to participate in the D'Aguilar float and they contributed strongly. Chris Rawlings, a Gympie Gold non-executive Director, is D'Aguilar's Chairman. Ian Levy, Gympie Gold's General Manager, Corporate Development is also on the D'Aguilar Board of Directors. Ron Cunneen, formerly Gympie Gold's General Manager of Gold Exploration, is now D'Aguilar's Exploration Manager.

Gympie Gold holds about 25% of D'Aguilar's shares and views the D'Aguilar initiative as an exciting way to inject new resources and ideas into the exploration of the Gympie district.

PERSONNEL

A year like 2002-03 makes exceptional demands on a small management team. They responded with a drive and dedication of which I am most appreciative.

Pressures such as these also lead inevitably to the re-assessment by the Company and by individuals of roles and responsibilities. We have made a number of important changes. Peter Hayes has been appointed to the new position of Chief Operating Officer and Arthur Gillen has been appointed Chief Financial Officer. John Leach, who served the Company diligently for eight years, retired as Finance Director. Personnel numbers at Gympie Eldorado were reduced and Rob Scargill was appointed General Manager, Gold Operations; Bruce McQuitty was appointed Exploration Manager, Gold.

To my Board colleagues and to the Managing Director, Harry Adams, may I express my appreciation for their efforts over the year.

Michael Darling
Chairman

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