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Outlook 2017

Gold-Mine Supply Still Creeping Higher...For Now

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(Kitco News) - Annual gold-mine output will eventually retreat due to cutbacks in exploration and development spending since the price crash of 2013, but not just yet.

Analysts look for mine supply to keep creeping higher in 2017 in response to the record-high gold prices hit back in 2011.

In each instance, there are several-year lags between the price action and impact on mining.

“We are expecting an ongoing increase in mine supply for at least the next two or three years,” said Rohit Savant, director of research with the New York-based consultancy CPM Group, in an interview with Kitco News.

This is because of the development efforts that were ongoing back around 2011, when spot gold hit an all-time high near $1,921 an ounce. While prices have pulled back since, there’s a tendency for companies to keep pushing ahead to recoup the investment they’ve already made.

But, development was hit harder by the 28% price decline in 2013, when gold fell under $1,200 for the first time in nearly three years.

“We think weakness we’ve seen in prices from 2013 until now will start showing a negative impact (on mine output) beyond 2019,” Savant said. “You’ve seen a major scaling back of expenditures in both existing mines as well as new mines.”

Producers cut back on investment in projects as companies struggled to remain profitable while revenues fell as a result of declining gold prices. Capital from banks also was harder to acquire as lenders became more nervous about the profitability of producers.

Oliver Heathman, head of mining research with Metals Focus, described a scenario in which the number of new projects declined in recent years although existing mines mostly remained in operation. He pointed out that only four new mines, producing three or more tonnes of gold per year, came online in 2016, compared to 10 per annum during the period from 2010 to 2013.

“You’ve seen a lack of new projects coming on line,” he told Kitco News. “As miners have been cutting costs, they’ve been able to keep existing operations open.”

In fact, at some existing mines, output has actually gone up as producers try to churn out more metal from higher-grade areas in order to lower per-ounce costs, he added.

CPM Group anticipates 2016 gold-mine production will end up around 97.2 million ounces, and then edge up to 98.7 million in 2017, Savant reported. The consultancy looks for a further uptick to 99.6 million ounces in 2018, but then a plateau can be expected, with 99.5 million projected for 2019.

“Then it starts coming off more sharply in future years,” Savant said. “It will decline for about eight or nine years.”

Metals Focus also looks for a “marginal” gain in 2016, Heathman said.

“However, with an increase of just 0.3%, the situation is more one of equilibrium, as a thinning project pipeline is being balanced by declines at a number of established gold-producing countries,” he said.

Metals Focus projects 2016 mine output of 3,237 tonnes, followed by 3,243 in 2017. Eventually, the consultancy anticipates a “gentle drift down” rather than a significant drop-off in mine supply. All of this comes after “significant growth” over the last several years, Heathman said. Production back in 2010 was 2,770 tonnes, according to the consultancy’s data.

“Production is set to plateau between 2016 and 2018, before entering a period of secular decline from 2019,” Heathman said. “However, with the 2019-21 decline expected to average just 0.5% per year, production in 2021 will remain above pre-2015 levels.”

By Allen Sykora of Kitco News; asykora@kitco.com

 

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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