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Cash costs, hedging and big new mines could see global gold output rise 2013/2014

Global gold output may well prove to have been flat, in 2012 but looks likely to rise again in 2013 and 2014 as big new projects come on stream.

Despite a poorly performing gold price which, if it continues, will likely see some new project curtailment and a decline in exploration leading to possible production shortfalls in the years ahead, 2013 and 2014 both look likely to see an increase in global gold output following a likely flat output, or even a small dip in 2012. (World Gold Council statistics show an 80 tonne fall in global gold output during the first half of 2012, and although there was a big pickup in Q3, Q4 figures will have been adversely affected by the South African mine strikes which led to some operations being shut down for several weeks.)

In particular major and mid-tier gold mining companies are under pressure to reduce cash costs and one of the main responses to achieving this is to mine higher grades than earlier planned – and at the more marginal end of the mining scale this is actually a necessity if the mines are to stay in business.  If the mines can do this, while maintaining plant throughput, then gold production rises. 

A fall in the gold price too – and there’s perhaps been an ominous start to the year in this respect -will have a similar effect on actual output.

The seemingly anomalous increase in gold production as a result of falling prices is also a result of miners raising grades to stay in business in the hope prices will improve (at which point the lower grade material can be mined again, unless underlying costs have risen too far in the meantime).

This is particularly true in South Africa, and for those companies mining relatively high grade vein deposits where there can be much more control over grades than in some of the big bulk mining operations where gold may be produced primarily as a significant byproduct to a big base metals mine.

There is also going to be pressure again, particularly from the financial institutions, for new and expanding gold mining operations to forward hedge output at current price levels, which effectively puts additional supply into the market as far as the statisticians are concerned.  Hedging has been hugely out of favour in recent years with most mining companies buying back their forward sales positions (dehedging) in order to try and take advantage of what had been seen as perhaps continuously rising gold prices.

The more the financial community providing the funding for new project development doubts the mantra of the gold price continuing to rise ad infinitum – and lets face it this is at best a very conservative group – they will seek to protect their project finance investment by forcing borrowers to hedge output forwards and will only lend under these conditions.

With risk finance particularly tight at the moment, the bankers do hold the whip hand in this respect – while for those developing the mines securing payment for future production at current levels may be beginning to look attractive once more.  This can also be achieved by royalty and streaming deals, of course, but the funds available from this source tend to be more limited.

And then there are some big new projects either coming on stream in 2013 – or coming up to full capacity – which could more than compensate for some declining grades and closures elsewhere.

The big Barrick/Goldcorp Pueblo Viejo project in the Dominican Republic is a particular case in point and will be ramping up to full production of 1 million ounces a year (around 30 tonne/year) and there are a number of other significant new gold miners due to come into production this year and next while some base metal operations with very significant gold byproduct production like Oyu Tolgoi in Mongolia, with a potential annual gold output of 330,000 ounces (around 10 tonnes), while the world’s third largest gold producer – although itself primarily also, like Oyu Tolgoi, developed as a copper producer, Freeport’s Grasberg mine in Indonesia (at times actually the world’s largest producer of gold), should see a significant gold output increase this year as it recovers from some technical and labour problems which reduced gold output over the past two years.

In Canada there have been some substantial major new gold mine developments.  What will be Canada’s largest gold mine at Detour Lake in Ontario is due to come on stream this month and forecasts gold production of 300,000 – 400,000 ounces this year alone, building up to over 600,000 ounces a year.  Canada has been increasing its annual gold production over the past few years and there are a number of new developments in the pipeline which will continue this trend, and some potentially huge exploration projects awaiting development should financing become available.

In the U.S. there is continuing new mine production and expansion in and around the Nevada gold fields in particular, while Latin America is also seeing  substantial new gold mining development , although mostly on a smaller scale, but cumulatively significant nonetheless.  There is one particularly significant megaproject though under development in Barrick’s Pascua Lama mine, straddling the Chilean and Argentinean borders, where first production is now due in mid-2014, but is projected to average 800,000 – 850,000 ounces of gold a year for the first five years of production together with 35 million ounces of silver.  The same company’s Veladero mine almost next door to Pascua Lama is also expanding output .

Africa also has a major gold mining project due to come on stream in late 2013 in Randgold/Anglogold’s Kibali operation in the DRC which is scheduled to produce 600,000 ounces a year when it achieves full production in 2014/2015 while there are again a number of much smaller, but cumulatively significant, gold mining projects due on stream in West Africa over the next few years.

Back in Asia, Chinese gold production continues to grow.  Already the world’s largest producer of gold, annual output is planned to increase to over 400 tonnes a year by 2015 – this year’s output could well reach 390 tonnes.  Slow growth, but growth nonetheless.

Australasian production also continues to increase with a number of new operations coming on stream in the Kalgoorlie area, while Newcrest, the largest Australian listed gold producer and one of the top five gold mining companies globally by production, reserves and market capitalisation has brought its big Cadia East project on stream in 2012 so should reach full production this year bringing its Cadia Valley gold output up to around 800,000 ounces a year. 

The company is also expanding its Lihir operation in Papua New Guinea to raise production from 604,000 ounces achieved in 2012 financial year to over 1 million ounces year over the next couple of years.  It is also expanding its Hidden Valley gold jv also in Papua New Guinea and its Gosowong mine in Indonesia.  Further down the road there is the enormous potential of the Wafi Golpu porphyry copper/gold finds, again in jv with Harmony in Papua New Guinea described as the world’s richest such projects.

So global gold output may well continue on an upwards trend for the time being, unless there is a gold price collapse, but perhaps new project development could falter in the second half of the decade if the gold price remains flat or falls given the decimation of the junior gold exploration sector – the source of most major gold finds over the years.  Older mines will continue to see declines due to falling grades and closures – factors particularly affecting the South African gold mines not so long ago dominating global gold output, but now falling rapidly down the table of global gold producers.  As can be seen from the table below the country had already fallen to fourth place in 2011 according to figures from consultancy CRU, and has likely fallen a notch further this year almost certainly being overtaken by Russia, where production is rising.

 

Country

2011 Output (tonnes)

China 

380

Australia        

272

U.S. 

243

South Africa 

221

Russia

205

Peru

156

Ghana

102

Canada  

101

Indonesia 

97

Mexico

82

 

 

World Production  

2,789

iPad Version – Pic: courtesy of AngloGold Ashanti

 
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