Gold mining supply
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Despite the bull market, gold mining supplies fell 2% last year, says Helen Holten at Standard Chartered Bank, and GFMS's latest data agree. Virtual Metals in London reckon output slipped only 1.5% from 2005. Whatever the true figure, it's clear the leading analysts agree that mining supply fell..
Gold mining companies are trying to shift all the earth they can, of course. But mounting problems of cost, politics and finance are capping how fast they can dig gold ore out of the ground.
First, the "easy gold" in secure and safe regions has already been mined. North American output this year is forecast at just 78% of 2002 levels. South African output has halved since 1998. Ore grades in both countries are falling fast too, while less stable regions have yet to pick up the pace. Zimbabwe's gold output, for instance, has fallen to "pathetic levels" according to press reports from Harare.
Then there's cost. Newmont Mining Inc., the second largest gold miner in the world, was recently downgraded to "underweight" by mining-stock analysts due to its increased expenses. In the five years to November, average production costs at Newmont rose by two-thirds per ounce. Prudential Equity now forecasts that Newmont's combined output with Barrick Gold, the largest gold miner in the world, will be 40 or 50 tonnes less than expected in 2007.
As the gold miners extract their ore, the value of their balance-sheet assets shrinks. But replacing gold-in-the-ground with new discoveries is proving tougher than ever. Westhouse Securities estimates that between 1985 and 2003, new gold ounce discoveries slipped by 30% from the previous 15 years. Each new ounce discovered also cost 2.6 times as much to locate. And large deposits – judged at 2.5 million ounces or more – aren't enough to replace the major gold mining companies' current rate of production, says the Metals Economics Group in Halifax, Canada.
Between 1992 and 2005, world output totalled 1.1 billion ounces. New large reserves were barely half that size.
Socialist thieves & crazy mine bosses
Gold mining stocks also face the classic problem thrown up by a commodities boom – populist governments stealing their assets. The military government in Fiji last week seized the Vatukoula mine belonging to DRDGold, an Australian firm. In December the Russian environmental agency Rospriradnadzor revoked two mining licenses owned by Peter Hambro, the London-listed gold producer. Western gold mining firms must also contend with a new political threat bred much closer to home – environmental activists backed by charities like Greenpeace, Friends of the Earth and American Oxfam.
Take Gabriel Resources' project at Rosia Montana in Romania, for instance. It may hold the largest undeveloped gold reserves in Europe, but upturning five mountains to get at 450 tonnes of gold doesn't fit with today's green politics. And there are no "carbon offset" contracts for spilling mercury, cyanide and heavy metals into local rivers.
What can the major gold miners do to defend their share price? Like any sane corporate executives today, mining bosses have gone crazy for mergers and acquisitions. Merrill Lynch said last week that global gold mining M&A hit a record $19.3 billion in 2006 amid frantic corporate action. But digging for gold on the stock market did nothing to increase total global supplies. Nor does M&A simply shift gold reserves from one balance sheet to another.
The net effect is to cut exploration spending as the majors focus on boardroom deals and the number of risk-taking juniors is reduced. Falling reserves replacement over the last 10 years "may result in gold supply shortages in the long term," warn the analysts at MEG.com.
Will today's M&A frenzy prove short-sighted? Consider how the industry responded to the slump in gold prices during the 1980s and '90s. By June 2001, says the Mitsui Hedge Book, the global gold mining industry had sold forward a massive 3,421 tonnes of production – as yet unmined – onto the futures market. Well over 135% of an entire year's output, that "hedging" made short-term sense during gold's 20-year bear market. It funded production and locked in fixed prices for future gold output. But it also helped drive prices lower.
What de-hedging means for the gold price
Now that investors have taken control and trebled the gold price versus the US dollar, the mining companies are desperate to buy back their forward sales. Between April and June last year, gold mining companies led by Barrick and AngloGold Ashanti de-hedged by 158 tonnes. That helped drive the gold price up to its huge spike above $720 per ounce in mid-May '06. “The rate of dehedging was bound to slow afterwards," says Edel Tully, head of precious metals research at Mitsui.
But the latest data – for June to September – show that "global mining companies remain committed to reducing their hedge commitments and have very little appetite for new hedging."
What about the other major source of gold supply – sales of gold by Western central bankers...?
Despite the bull market, gold mining supplies fell 2% last year, says Helen Holten at Standard Chartered Bank, and GFMS's latest data agree. Virtual Metals in London reckon output slipped only 1.5% from 2005. Whatever the true figure, it's clear the leading analysts agree that mining supply fell..
Gold mining companies are trying to shift all the earth they can, of course. But mounting problems of cost, politics and finance are capping how fast they can dig gold ore out of the ground.
First, the "easy gold" in secure and safe regions has already been mined. North American output this year is forecast at just 78% of 2002 levels. South African output has halved since 1998. Ore grades in both countries are falling fast too, while less stable regions have yet to pick up the pace. Zimbabwe's gold output, for instance, has fallen to "pathetic levels" according to press reports from Harare.
Then there's cost. Newmont Mining Inc., the second largest gold miner in the world, was recently downgraded to "underweight" by mining-stock analysts due to its increased expenses. In the five years to November, average production costs at Newmont rose by two-thirds per ounce. Prudential Equity now forecasts that Newmont's combined output with Barrick Gold, the largest gold miner in the world, will be 40 or 50 tonnes less than expected in 2007.
As the gold miners extract their ore, the value of their balance-sheet assets shrinks. But replacing gold-in-the-ground with new discoveries is proving tougher than ever. Westhouse Securities estimates that between 1985 and 2003, new gold ounce discoveries slipped by 30% from the previous 15 years. Each new ounce discovered also cost 2.6 times as much to locate. And large deposits – judged at 2.5 million ounces or more – aren't enough to replace the major gold mining companies' current rate of production, says the Metals Economics Group in Halifax, Canada.
Between 1992 and 2005, world output totalled 1.1 billion ounces. New large reserves were barely half that size.
Socialist thieves & crazy mine bosses
Gold mining stocks also face the classic problem thrown up by a commodities boom – populist governments stealing their assets. The military government in Fiji last week seized the Vatukoula mine belonging to DRDGold, an Australian firm. In December the Russian environmental agency Rospriradnadzor revoked two mining licenses owned by Peter Hambro, the London-listed gold producer. Western gold mining firms must also contend with a new political threat bred much closer to home – environmental activists backed by charities like Greenpeace, Friends of the Earth and American Oxfam.
Take Gabriel Resources' project at Rosia Montana in Romania, for instance. It may hold the largest undeveloped gold reserves in Europe, but upturning five mountains to get at 450 tonnes of gold doesn't fit with today's green politics. And there are no "carbon offset" contracts for spilling mercury, cyanide and heavy metals into local rivers.
What can the major gold miners do to defend their share price? Like any sane corporate executives today, mining bosses have gone crazy for mergers and acquisitions. Merrill Lynch said last week that global gold mining M&A hit a record $19.3 billion in 2006 amid frantic corporate action. But digging for gold on the stock market did nothing to increase total global supplies. Nor does M&A simply shift gold reserves from one balance sheet to another.
The net effect is to cut exploration spending as the majors focus on boardroom deals and the number of risk-taking juniors is reduced. Falling reserves replacement over the last 10 years "may result in gold supply shortages in the long term," warn the analysts at MEG.com.
Will today's M&A frenzy prove short-sighted? Consider how the industry responded to the slump in gold prices during the 1980s and '90s. By June 2001, says the Mitsui Hedge Book, the global gold mining industry had sold forward a massive 3,421 tonnes of production – as yet unmined – onto the futures market. Well over 135% of an entire year's output, that "hedging" made short-term sense during gold's 20-year bear market. It funded production and locked in fixed prices for future gold output. But it also helped drive prices lower.
What de-hedging means for the gold price
Now that investors have taken control and trebled the gold price versus the US dollar, the mining companies are desperate to buy back their forward sales. Between April and June last year, gold mining companies led by Barrick and AngloGold Ashanti de-hedged by 158 tonnes. That helped drive the gold price up to its huge spike above $720 per ounce in mid-May '06. “The rate of dehedging was bound to slow afterwards," says Edel Tully, head of precious metals research at Mitsui.
But the latest data – for June to September – show that "global mining companies remain committed to reducing their hedge commitments and have very little appetite for new hedging."
What about the other major source of gold supply – sales of gold by Western central bankers...?
Adrian Ash, 19 Jan '07
Adrian Ash runs the research desk at BullionVault, the world's fastest growing gold ownership service. Formerly head of editorial at Fleet Street Publications – London's top publisher of financial advice for private investors – he was City correspondent for The Daily Reckoning for four years, and is now a regular contributor to 321gold, FinancialSense, GoldSeek, Prudent Bear, SafeHaven and Whiskey & Gunpowder among many other leading investment websites. Adrian's views on the Gold Market have been sought by leading news organizations including the Financial Times, Bloomberg and Der Stern in Germany.
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