LAWRIE WILLIAMS: Gold mine output may have peaked – but will it make any difference?
We may indeed have hit peak gold production this year, but if we have will this factor have any impact on the gold price itself? It may improve sentiment towards investing in the yellow metal given that the pro-gold commentators will hammer the point in their end-year analyses and in their forward forecasts, but in terms of the gold supply/demand balance (if indeed this is even really relevant in metal price terms – see:With gold little is as it seems), any production downturn is likely to be very small in percentage terms, at least in the initial couple of years.
It may actually be the gold price itself which could be the principal contributor to a production fall – but not necessarily in the manner one would suspect. Ironically higher gold prices may lead to lower gold output, and vice versa. Higher gold prices will often encourage miners to work lower grade sections of their orebodies thus prolonging mine life, while lower gold prices may encourage miners who have appropriate flexibility to high grade and thus produce more gold at an unchanged mill throughput. Indeed if global gold output does not end up turning down slightly in 2016 it will likely be this latter factor which is primarily responsible given the pressures on the miners to lower unit costs and boost, or at least maintain, profits as gold declined from its 2012 peak. (One way of lowering unit costs is to boost production by high grading, while maintaining the same operational costs.)
But one factor stemming from these cost cutting programmes is that the miners have also been cutting exploration, expansions and other capital expenditures which will all have a knock-on effect in the years ahead and if peak gold is not actually with us yet it very certainly will be by the end of the decade. There have been very few truly major gold finds over the past few years which are necessary to replace aging mines at, or near, the ends of their lives and there has been a general declining grade trend. There are still some mega undeveloped gold deposits out there – think Pascua Lama, Cerro Casale, Caspiche, KSM, Snowfield etc – but these will all require massive levels of capital expenditure, and are probably uneconomic at current gold prices anyway due to low grades and known and unknown environmental problems. None of these are likely to be brought into production until well into the next decade – even if there is a substantial gold price increase – and by then it may be too little too late to halt the declining global gold output trend.
Even if some very large gold deposits are found in the near future, with the average lead time from discovery to production 10 years or more, these will have little impact on the global total.- even in the medium to long term.
So, even if we don’t actually see global peak gold output this year, it is definitely coming in the future, and when it does will likely accelerate as more and more elderly mines need to close and new production coming on stream is insufficient to counter the trend. In answer to the question posed in the title, the fact that global output may be falling a little in the short term is unlikely to make much difference to the gold price performance per se, but as time goes on the size of the likely fall will have an impact – and likely a substantial one, but don’t expect it to yet!
24 Dec 2016 | Categories: Gold