AUSTRALIAN gold production is losing its shine, having dropped sharply in the first three months of calendar 2008 to its lowest level in 19 years, a report finds.

While wet weather and mine closures caused some of the fall, the high gold price was also having an effect.

Miners were reducing their average grades to recover more gold over the life of the mine allowing them to take advantage of high gold prices.

Mining consultants Surbiton Associates found gold output for the March quarter was 53 tonnes, or about 10 tonnes or 16 per cent down on the December quarter figure.

The March quarter figure was about seven tonnes or 12 per cent down on the first three months of 2007.

Surbiton director Sandra Close said the falls were "nowhere near as bad as they seem".

"The primary cause of the sharp drop in output was the lower average grade of ore treated," Dr Close said.

"I suspect some operators are taking every advantage of the high gold price to reduce their head grade.

"This allows them to recover more gold over the life of the mine while still maintaining their profitability.

"Not only do lower grades reduce gold output, they also increase the cash cost per ounce of gold produced.

"When costs have to be spread over fewer ounces produced, obviously the cash cost per ounce must rise."

Increased cash costs were more than offset by historically high gold prices during the quarter, with strong margins achieved at Dominion Mining's Challenger mine, North Queensland Metals/Heemskirk Consolidated's Pajingo mine and Equigold's Mt Rawdon mine.

The output from some mines was lower due to operational problems, which forced the operators to treat lower grade ore than planned, she said.

"Also, wet weather caused some disruption.

"(Mine) closures accounted for about two tonnes of the quarterly production drop.

"Few new operations have come on stream lately but there are several slated to commence in the latter part of the year."

Some significant mines about to start up or under construction include Avoca Resources's Higginsville, St Barbara's Gwalia, Lihir Gold's Ballarat, Apex Minerals's Wiluna, Oxiana's Prominent Hill and Newmont Mining/AngloGold Ashanti's Boddington.

Dr Close said gold the industry was "doing a remarkable job keeping costs under control" despite the rising cost of labour, energy and consumables