Contrary to many reports and arguments put forward by gold commentators, the latest analysis by Thomson Reuters GFMS shows global new mined gold output as rising in 2013 – to 2,982 tonnes – an increase of around 4% on the 2012 figure.  As the GFMS report suggests this tends to show the gold mining sector’s short term inelasticity to the sharp fall in the gold price.

In our view the rise in global mined gold production is not surprising.  Major new gold mining project developments already under way will have come on stream, adding to the global total, while the industry’s rapid conversion to a focus on bringing operating costs down to profitable levels at the lower gold prices now prevailing does not mean, as many seem to suggest, that gold output would actually fall as uneconomic units are closed down, Rather, the tendency is for it to rise in the short term as miners struggle to make ends meet without actually having to close down their operations, except in extreme cases. 

The easiest way to accomplish this is to mine higher grades of ore, but at the same mining rate.  Ergo, constant mill throughput, coupled with higher ore grades, leads to higher gold output – while total overall costs remain much the same.  And constant cost levels with higher gold production means a fall in unit costs.  This becomes a quick fix to try and keep the shareholders happy!  It may look good in the books, but isn’t necessarily a longer term solution as it leads to a depletion in ore reserves and mine life as cutoff grades are increased.  The hope here is to keep operations profitable until the gold price picks up again, at which point, perhaps, the mine can revert to mining lower grades while still remaining in profit.

This meanwhile gives mine management a little breathing space to genuinely look for real cost cutting measures – but these too can be deleterious to an operation’s longer term future as the most likely immediate means of doing this is to cut back on capital expenditures, including exploration – which will ultimately lead to falling future production levels and mine lives.

This is why mining in general, not just gold mining, is prone to such dramatic price cycles which, if followed by the savvy investor can lead to great profit opportunities provided investment is made in those companies which can survive at the low cyclical price levels, but then reap the rewards of higher prices which will surely follow.

But such an investor will also need to be patient as the times between up cycles may be quite long (five years or more).

But when the next upturn does arrive it may well be even stronger than in the past.  The hoops and hurdles mining companies have to jump through or over become ever more complex and new mine developments take ever longer to permit thus deferring new production dates further and further into the future, while big new discoveries are becoming fewer and fewer.  In the gold space there are no deposits being found which are anywhere near the sizes and grades of those which dominated gold output in much of the last century.  There has tended to be a search for huge ultra low grade deposits which are potentially profitable if mined at a massive scale, but at a capital cost of many billions of dollars.  And these kinds of sums can not be financed out of a mining company’s own resources and, in the current climate, are not obtainable elsewhere either apart from in exceptional cases.