LAWRIE WILLIAMS: Australian gold output falls in Q1. Peak gold with us?
China, the world’s No. 1 gold miner has been gradually reducing gold output for the past few years, primarily because of increasing environmental clampdowns, and now we hear that Australia, the world’s No. 2 producer has seen a sharp production fall in the first quarter of the current year. According to the latest release from Melbourne-based specialist gold consultancy, Surbiton Associates, the country’s March quarter gold output fell by around 10 tonnes compared with the record December quarter last year.
While some countries’ gold mining operations have been affected by coronavirus-related shutdowns, Australia, as one of the least-affected nations, has not seen its gold mines so affected. Surbiton’s Dr Sandra Close, however, puts the lower output down, perhaps somewhat counter-intuitively to non mining-savvy observers, to higher gold prices. As we have pointed out frequently in the past, higher gold prices can tend to lead to lower gold production, rather than the reverse.
“The reduction in output is no cause for alarm -- it is no great surprise that the March quarter 2020 gold production is down,” said Dr Close. “I think record Australian dollar gold prices were a significant contributing factor. Many operators are now taking advantage of the extraordinary rise in Australian dollar gold prices through 2019 and early 2020,” she commented in the Surbiton release. “The March quarter 2020 saw a sector-wide reduction in both grade treated and tonnes treated, compared with the previous quarter and also there was one less day in the period.” (Despite 2020 being a leap year, the still short February month meant that the March quarter contained one day less than the previous period.)
She went on to comment that at times of prolonged high gold prices, many operations reduce the head grade of the ore being treated where possible. This still yields good profits because of the higher prices but the amount of gold produced actually falls. It also extends the life of the mines and leaves less gold in the ground, which is positive, but of course does result in higher operating costs per ounce. “The Australian dollar gold price averaged A$1,831 per ounce for the March quarter 2019 and A$2,410 per ounce for the March quarter 2020, a rise of over 30%,” Dr Close noted additionally. “The U.S. dollar price has also risen over the same period but only by around 21% by comparison, as the Australian dollar price has had the added benefit of a lower exchange rate.”
While 10 tonnes of gold may not seem to be a hugely significant amount in terms of global gold output, if such a decline is seen in the remaining quarters, Australia’s annual gold production could fall from around 315 tonnes in 2019 to around 275 tonnes this year – a fall of over 12%. This would probably relegate Australia to third place, behind China and Russia amongst the world’s top gold mining nations.
Given the big rise in global gold prices – exacerbated as in Australia’s case by the strong U.S. dollar which means bigger rises in domestic currencies in which most mining costs are incurred – we could also see similar percentage production downturns in some other gold mining nations as mining companies seek to prolong mine lives by cutting head grades to the mill. Add in coronavirus-related production interruptions and we will likely see an overall global gold mining volume fall of a hundred tonnes or more this year after many years of annual gold production rises. But before readers get carried away by reduced gold supply implications on prices, it should also be recognised that global demand will also be adversely impacted by the coronavirus lockdowns – we are already seeing a big fall in Chinese gold demand for example. Indeed the demand shortfall implications will probably exceed those of any fall in new-mined supply. Higher gold prices also tend to see an increase in supply from scrap sources too.
But as a gold positive we are already seeing substantially increased investment demand. Gold is flooding into gold ETFs at an almost unprecedented rate, while bullion purchases appear to be picking up in the West as equities look to be increasingly vulnerable and economies have been/are being hit by government attempts to reduce the spread of the COVID-19 virus pandemic. There is an increasing realisation that the hoped-for V-shaped economic recovery is highly unlikely to occur and any return to anything like normal is many months, if not years, ahead still, so safe haven precious metals demand is likely to stay with us for some time to come.