Major mining companies are warning that global gold mining output could fall below expectations in 2014, due to development cutbacks and policy shifts spurred by the 28% drop in gold prices in 2013.
The gold mining industry as a whole has taken at least $30 billion in write-downs, as in-ground stocks have had to be revalued downwards, and new projects cancelled.
Barrick Gold has written off $2.83 billion in losses, mostly related to three problem mines, including the Pascua Lama mine in the Chilean Andes. It has also been selling off smaller mines as it focuses on its largest and most profitable holdings. This has led Barrick to project production for 2014 to fall to a nine-year low of between 6 million and 6.5 million ounces (compared to nearly 7.2 million ounces last year). CEO Jamie Sokalsky says his company isn’t the only one, saying “We are in an inflection point now where I think ultimately gold production in the industry could start to decline more than people think.” He sees lower production supporting a gold price that has already hit bottom, in his estimation, calling for a gold price between $1,400 and $1,500 an ounce in 2014.
Bloomberg cites McEwen Mining CEO Rob McEwen as agreeing that global production will drop in 2014, while Goldcorp CEO Chuck Jeannes would not be surprised. Newmont CEO Gary Goldberg thinks that high grading will keep production growing for 2014, but declining next year.
Mines have been “high grading,” which is bypassing all but the purest veins in a mine, in order to bring down the costs per ounce of production. The problem with this is, it can shorten the life and total output of the mine, by leaving lower grade ore in pockets that cannot be safely mined. In normal operations, the high grade and lower grade veins are taken out together and processed together.
Another crimp in future mine production is the cancellation of exploration and expansion projects. It can take up to a decade to find a promising site, clear the legal and environmental hurdles, and bring a new mine to production. Some new supply will result from projects that were started in recent years are are close to completion., while those projects that made sense when gold was $1,500 an ounce but would lose money at $1,100 an ounce will be suspended.
More expansion plans and proposed new mines are being cancelled due to what some would call “predatory” practices by the host nation. Some developing countries, seeing gold’s bull market of 2009-2012, decided to unilaterally change existing agreements with mining companies for a bigger slice of the pie, and persist in this goal despite gold’s price drops. Other nations threaten nationalization of existing mines. This can lead companies to cut their losses on problematic projects. Kinross Gold walked away from a mine in Ecuador that it had spent $1 billion on, because the government demanded a 70% windfall profits tax.
Finally, gold recycling has dried up in the last year. As Newmont CEO Gary Goldberg said, “I always point out the guy rotating the little sign on the street corner: ‘We buy gold’. You don’t see him so much out there anymore.”