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Alex Létourneau

Outlook 2013: Gold-Mine Supply Set To Rise With New Projects Coming Online

By Alex Létourneau of Kitco News
Thursday January 3rd, 2013 10:08 AM

(Kitco News) - Gold-mine supply is expected to rise in 2013 as analysts see new projects coming online to add to 2012’s production totals.

Without analysts specifically naming which mines were going to begin production in 2013, some of the large scale projects that will startup this year are Rio Tinto’s (NYSE: RIO) Oyu Tolgoi mine in Mongolia and Detour Gold Corp.’s (TSX: DGC) Detour Lake project in Ontario, that will push gold-mine output higher.

Rohit Savant, a senior commodities analyst with the consultancy CPM Group, said he sees gold-mine supply rising 4.3% from 80.5 million ounces to 83.9 million ounces in 2013.

“It’s essentially a few large mines coming on stream; also you’ll see very high gold prices over the past few years which has made mining lucrative,” Savant said. “A lot of new projects are being started, expansion plans, all of that is now showing up on the supply side.”

Bart Melek, director of commodity strategy with TD Securities, also forecast rising gold-mine supply in 2013. Melek said believes supply will grow by roughly 1.5% this year mainly from projects in Ontario, Indonesia and the Dominican Republic, coupled with miners trying to control cash costs.

“I think the risk is to the downside particularly because of all the disturbances we’ve been seeing in the market place, and I think there are issues surrounding commitment to capital expenditures with major miners, and not only precious metals but everything from iron ore to copper to everything else,” Melek said. “Increasingly investors do want to see some cost control so some projects that have been high cost and may have been planned may be delayed or scaled down. But ultimately prices are still at levels that are pretty good for quite a lot of miners, the economics are excellent.”

The Pueblo Viejo mine, a joint-venture between Canadian mining giants Barrick Gold Corp. (TSX, NYSE: ABX) and Goldcorp Inc. (TSX: G)(NYSE: GG) in the Dominican Republic, came online mid-2012 and will have its first full year of production in 2013 with roughly 1 million ounces of annual production expected.

While new projects will drive gold supply this year, gold prices are always involved in the mix.

“My guess would be (supply) remains the same and maybe eventually increases a bit,” said Afshin Nabavi, head of trading at MKS Finance. “I’m quite positive on the price of gold, and I think gold will floating around the $2,000 area, so if I’m right, which is a big ‘if,’ I think new projects coming along will boost supply. If new all time highs are reached in gold prices, I wouldn’t be surprised to see new projects coming into play.”

South African Gold-Mine Supply Looking Grim In 2013

The heavily reported labor strife that hit South Africa for much of the second half of 2012 led to several gold mining leaders to curb or altogether shut down operations, meaning the outlook for production in 2013 isn’t too rosy.

CPM Group said that South African output will struggle in 2013, mainly because mining companies already operate at high cash costs, which is problematic if gold prices trend lower.

“If gold prices do come off, which is what we’re anticipating in 2013, those mines are likely to get hit first.  In addition to that you have all these structure problems in the country in terms of electricity, water and then you have all those labor problems,” Savant said. “That is the only major country that we have mine production coming off a little next year.”

The labor strife that spread throughout the country gave mining companies something to think about when it came to operating projects in South Africa. Analysts are not clairvoyants but they use trends and patterns in order to speculate what could happen in countries that are more at risk than others.

“I factor it in (South Africa),” Melek said. “You can’t predict natural disasters or labor strikes when and where but there is a fairly decent rate of these events that happen randomly. Out of a huge sample, you can always distinguish a rate.”

Figures have begun rolling out regarding the production effects of the strikes in South Africa. Most recently Statistics SA released a report showing gold production down 46% for the month of October.

Canada, China, Latin America Emerging As Strong Producing Parts Of The World

As new projects come online in different parts of the world, analysts see strong gold production emerging from regions of the world that were not necessarily considered big gold mining countries.

Savant and Nabavi suggested that Latin America will become a greater power in the gold mining community.

Barrick’s Pascua Lama project, located on the border of Chile and Argentina, saw production pushed to 2014 and was hit with huge cash costs and environmental throughout its construction. The mine will produce an average of 800,000 to 850,000 ounces of gold when it does finally come online.

“You also have China which is growing,” Savant said. “The primary producers there are expected to push production higher because, unlike South Africa, the cash costs there, for the major producers, are actually on the lower end at $450-$500 an ounce.”

Canada is also getting some attention as large projects are beginning production.

“With all the stuff happening around the world with resource nationalization, labor strife, geopolitical issues, I think people will seriously be looking at Canada,” Melek said. “There’s stability, good legislation and we’ve got the resources so I think people will look at Canada.”

Detour Gold’s Detour Lake Project will produce an average of 657,000 ounces of gold annually when it begins production this month.

Goldcorp also has the Éléonore project in northern Québec which, according to the company’s website, “in conjuction with refinements to earlier technical work, the new development plan details a doubling of the plant thorughput to 7,000 (metric) tons per day, contributing to an average of more than 600,000 ounces of gold production per year over an approximate 15-year mine life.” Goldcorp is targeting 2014 production.

By Alex Létourneau of Kitco News aletourneau@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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