Australian gold output slips 2 pct as miners dig lower grade ore

By James Regan

SYDNEY, May 29 (Reuters) - Gold output in Australia, the world's second biggest producer, slipped 2 percent in the first quarter, due in part to mining of lesser grade ores during a period of higher bullion prices, a survey released on Sunday showed.

Australian gold production reached some 71 tonnes in the first quarter, around 1.5 tonnes, or 2 percent lower, than the previous quarter, according to the survey by sector consultants Surbiton Associates in Melbourne.

"Many operators have the flexibility to trim their grades and still make a reasonable profit," said Surbiton's director, Sandra Close. "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 mining companies had preserved some richer grade ores for leaner times while gold prices firmed in the first quarter, leading to the decline. That strategy may not play out in the current quarter as gold prices once again contract.

Gold prices have been falling for most of the second quarter, both in U.S. dollar and Australian dollar terms.

Since late April, the Australian dollar has fallen 5.8 percent against the U.S. dollar, while the U.S. dollar gold price has dropped 6.5 percent.

"Gold has been on the back foot for a month now," said Warwick Grigor, a director of fund manager Far East Capital.

"Had it not been for the simultaneous fall in the Australian dollar, the market reaction would have been greater," Grigor said.

The U.S. gold price last week suffered its biggest fall since early November - its fourth straight weekly decline - amid growing expectations that a U.S. interest rate hike may be on the cards sooner rather than later.

A reversal in economic policy in Australia that led to the country's first rate hike in a year this month also has kept downward pressure on the Australian dollar, which was helping some producers maintain margins as prices dropped, according to Jake Klein, executive chairman of Evolution Mining, Australia's second biggest gold miner.

"Five years ago, Australia would have been in the highest-cost quartile of gold miners," Klein said.

"Today it is probably the lowest, in absolute terms and also when taking into account the weaker Australian dollar," Klein said. "That has been a great help."

Australia's gold output was 285 tonnes in 2015, a distant second to the roughly 450 tonnes dug out of mines in China last year, according to industry data.

A decade ago, South Africa was the top gold producer followed by the United States, Australia and China.

(Reporting by James Regan; Editing by Paul Simao)