Commodity Price and Exchange Rates
The gold price (US$ per troy ounce) on the London Bullion Market ("LBM") made strong gains early in 2008, largely as a result of continued weakness in the US dollar. Gold prices reached an all-time high of $1,011 per ounce in March and averaged $911 per ounce in the first half of 2008. In the second half of the year, as the credit crisis deepened, the US dollar strengthened and gold prices moved lower, reaching an annual low of $713 per ounce on October 24. Subsequently, concerns about the health of the world economy and financial system pushed gold prices dramatically higher to close the year at $870 per ounce. From the perspective of gold producers like Northgate, whose production costs are largely denominated in currencies other than US dollars, the final months of 2008 and the early months of 2009 marked a significant period of profit margin expansion, as the US dollar price of gold increased without an offsetting decline in the value of the US dollar relative to other currencies.
In the first half of 2008, copper prices increased dramatically and continued with this momentum early into the second half of the year, reaching an all-time high of $4.08 per pound on the London Metal Exchange ("LME") on July 3. However, the onset of the world financial crisis in the fall of 2008 had a devastating effect on copper prices as hedge funds were forced to liquidate their long positions and market sentiment turned against the metal as a result of concerns about future demand in light of the looming downturn in industrial production. Copper prices rapidly came off their all-time high, reaching a 2008 low of $1.26 on December 24, dropping 70% to close the year at $1.28 per pound. As a result of this decline, a number of Greenfield copper development projects and Brownfield expansions were put on indefinite hold. However, unlike zinc, nickel and aluminum, very little existing mine capacity was eliminated as copper prices did not fall far enough. Similar to previous years, the future direction of copper prices will depend on how robust demand is in China and India.
The Kemess South mine produces a gold-copper concentrate, which is shipped to Xstrata Canada Corporation's ("Xstrata") Horne smelter in Rouyn-Noranda, Quebec, for smelting and refining. During 2008, annual terms for the processing of concentrate decreased to an all-time low of $45 per tonne of concentrate and $0.045 per pound of copper ($45/4.5) with no price participation. The decline in smelting and refining terms for copper concentrates in recent years was fueled by strong demand from recently constructed copper smelters in developing nations such as China and India, and strong sulphuric acid prices and cathode premiums. In the fourth quarter of 2008, the drop in commodity prices lead to a sharp reversal of the factors that had been supporting lower treatment and refining charges, leading to settlements of annual terms at $75/7.5 for 2009.
The Canadian dollar remained close to parity with the US dollar for the first half of 2008, reaching a high of $1.025 in February, supported by robust commodity prices and Canada's very positive current account balance. As the worldwide credit crisis and global recession took hold in the second half of 2008, the Canadian dollar declined dramatically to a low of $0.77 versus the US dollar in November before recovering somewhat to end the year at $0.82.
The Australian dollar followed a similar pattern hitting a high of US$/A$0.979 in mid-July, dropping precipitously to a low of $0.60 at the end of October before rebounding to close the year at $0.70. The balance of this MD&A contains a detailed discussion of the factors contributing to Northgate's financial results for the past two years.