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Mining CEOs Agree, We Could See A 2015 Gold Supply Crunch

By Alex Létourneau of Kitco News
Tuesday December 23, 2014 10:00 AM

(Kitco News) - As another year goes into the books, gold mining companies are looking into mine plans and strategies for the new year.

While each mining company will naturally have their own specific projections in terms of mine planning, exploration, development, projects in the pipeline and balance sheets – there are underlying similarities.

Among them is a very real possibility of a gold supply crunch in the coming years.

“I think there’s no question that’s going to happen because the lead time on some of these projects is a lot longer than it used to be,” said Sean Boyd, president and chief executive officer of Agnico Eagle Mines Ltd. (TSX:AEM)(NYSE:AEM) to Kitco News. “If you look at the industry 20 years ago, it’s much more difficult now to advance a project, even to find a good quality project.

(From left to right) Gary Goldberg, Rob McEwen & Sean Boyd

“Grades are down, projects are tougher, they’re more remote, which makes it a much more challenging business right now,” he continued. “The industry is allocating less to exploration to make new discoveries, or allocating less money to the pipeline – so, the pace of the projects moving through that pipeline is slowing down, that’s going to impact supply.” 

Rob McEwen, chairman and chief owner of McEwen Mining Inc. (TSX:MUX)(NYSE:MUX) told Kitco News that he expects gold to reach US$2,000 an ounce by the end of 2015, with that figure linked to less supply on the horizon.

“We’ve seen a lot of the gold that went into the ETFs and this hoarding that occurred from 2005 to 2011, a lot of it has come out,” McEwen said. “ETF gold was a multiple or two of annual production at certain points during that period, and that gold has come out of the ETFs and gone to Asia.

“So, the next time gold runs, there’s not as much gold available,” he said. “The supply of gold has been curtailed both through cutbacks and development projects – so there’s going to be a gap in production that could be three to five years long before it’s properly addressed.”

Part of that is mining companies are no longer simply chasing ounces. As Gary Goldberg, president and chief executive officer of Newmont Mining Corp. (NYSE:NEM), said to Kitco News, it’s all about value over volume these days.

“We have refocused Newmont’s strategy on value over volume, positioning the business to deliver safe, responsible and profitable gold production in every cycle,” Goldberg said. “Over the last two years, our work to optimize our portfolio generated nearly $1.7 billion in cost and efficiency improvements, and nearly $1.4 billion from the sale of non-core assets.

“This performance gives us the means to invest in profitable growth, pay down debt and return capital to shareholders,” he said. “We also improved the value and viability of our growth pipeline, which includes expansions in Nevada, Ghana, and Australia; new districts in Nevada and Suriname; and promising exploration prospects in favorable jurisdictions.”

Boyd also noted these are interesting times as he sees this as a great opportunity to be building and drilling, but most company balance sheets won’t allow it.

“I think it’ll be more financial balance sheet driven as we go through 2015 given the uncertainty around the gold price, which is interesting, because if you step back, the state of the support, or the service sector, to the industry – it’s actually the best time to be drilling in terms of cost and value,” Boyd said. “In fact, it’s a great time to be building.

“But the balance sheet and the gold price aren’t allowing the industry to be as aggressive as they may want to be given the conditions of drilling and building things,” he added. “It’s an interesting dilemma companies have.”

McEwen sees balance sheets as part of the main focus in 2015, but thinks that companies are shooting themselves in the foot while trying to raise capital.

He noted that while some balance sheets are in good condition, others are damaging their profiles by selling royalties or metals streams. “Yes it does provide them financing, and yes it is non-dilutive, but it’s reducing their profits. It’s sort of a compelling siren song, but it’s not good for shareholders.”

By Alex Létourneau of Kitco News aletourneau@kitco.com
Follow Alex Letourneau @alex_letourneau



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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