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LAWRIE WILLIAMS: Gold mine output turning down this year. Is Peak Gold with us?

The latest weekly Precious Metals newsletter from London-based specialist consultancy Metals Focus at last sees gold output growth grinding to a halt during the current year.  Many commentators have been predicting this to happen almost every year since the metal price fell back sharply in 2011, largely ignoring new mega-projects already under construction and too far advanced to be dropped (like Pueblo Viejo in the Dominican Republic) and the industry’s propensity to switch to mining higher grades, where this was possible, to counter declining revenues.  As a result of these trends annual global gold output has actually been rising over the past few years, albeit relatively slowly, but Metals Focus now sees this increasing output trend coming to a halt during the current year.

And along with the halt in increasing gold output, the consultancy sees All in Sustaining Costs (AISC) beginning to increase again. The newsletter notes global AISC rose in Q1 2017, both quarter on quarter(+4%) and year on year (+8%), driven by a recovery in some key producer currencies (most notably the South African rand), the general pickup in the commodities sector (which is fuelling an increase in labour expenses and the costs of mine-site consumables) and an increase in sustaining capital expenditure (as the industry looks to adequately reinvest following a period of austerity).

Indeed, Metals Focus comments that the annual supply of new gold (as opposed to recycled material) has grown by around 800 tonnes since 2008, an increase of around 25-30%. It puts this growth trend down to being driven by production increases in countries like China, Russia and Mexico coupled with a number of new mine startups across Africa (outside of South Africa) and a recovery in more mature mining jurisdictions, such as Canada and Australia.  But now it sees this increasing production pattern coming to an end.  Could Peak Gold, so beloved of gold bulls actually be with us at last?

Metals Focus analysts have noted a specific downturn in Q1 this year compared with a year earlier, although only of about 0.4%, but one would expect the trend to continue downwards for the foreseeable future.  Even a very sharp increase in the gold price would be unlikely to halt the decline -  at least for several years.  Indeed it might accelerate the trend as those mines which have been high grading may well switch back to working lower grade ores made viable by the onset of higher metal prices.

As to specifics, the analysts comment that gold mine supply declined by 0.4% y/y in Q1 2017, as a sharp decline in China (the world’s largest gold producer) offset some weighty additions from the project pipeline. They see Chinese output as having fallen by around 10% year-on-year in Q1, due to an extended New Year holiday at some mines and refining companies and, more significantly, the introduction of stricter environmental regulation (targeting the discharge of cyanide in tailings), which meant a number of more marginal operations were forced to close.

Outside China, sizeable country level declines were limited, with Mongolia the only other exceeding 3 tonnes year-on-year; Mongolia continued to be impacted by a low-grade gold mining phase at the Oyu Tolgoi copper operation which produces a significant amount of byproduct gold. Offsetting this, additions were driven by the ramp-up of a number of projects which entered production in 2016, namely Merian (Suriname), Yaramoko and Karma in Burkina Faso), and Long Canyon and the Cripple Creek & Victor expansion (both in the US). Without the contribution of these 2016 startups the decline in Q1 2017, and 2017 as a whole, would be significantly greater.

But overall the gold mining sector remains profitable and with the gold price expected to rise through the remainder of the year, Metals Focus analysts  expect margins to increase in spite of continued cost inflation.

As a conclusion , the analysts see mine supply as holding up reasonably robustly, at least in the near-term  but even so they forecast that global gold mine production will fall marginally overall in 2017, bringing to a close nearly a decade of continued growth. In keeping with the first quarter trend, this will be principally driven by lower output from China, as the ongoing effects of stricter environmental legislation continue to impact the rest of this year and into 2018. This will outweigh new additions from the development pipeline, which is yet expected to push production higher in a few countries.

All the major precious metals consultancies – Metals Focus, GFMS and CPM Group – are pretty close on how they see global gold output developing.  They do expect to see production declining by the end of the current decade but at a pretty low rate, but this could accelerate in the 2020s.  However in the near to medium term this is unlikely to have much impact on the supply/demand patterns for the metal. 

We continue to see gold flowing from West to East as the expansion in Asian wealth in particular, and the propensity of the citizens in that region to accumulate gold as financial insurance will gradually see pricing power for precious metals moving eastwards.  But there may well be only a slow rising price impact until the Chinese central bank achieves its gold accumulation targets (assuming we are correct in our assumption that it is still building its gold reserves, albeit surreptitiously again) – and then who knows?

22 Jun 2017 | Categories: Gold

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