All That Glitters

Our Thirst for the Noblest of Elements

Gold exploration is big business. The industry’s global value is over $7 trillion based on its current approximate value of $1300 (US) per ounce. Twelve years of rising gold prices made 2009 the year of earnest production, peaking in 2012 when 2700 metric tons was delivered to market. By 2013, a drop in the gold price led some smaller mines to consider partial or full closures in an effort to reduce or cut operating costs.

To ascertain how the possibility of continued declining gold prices may affect mining operations globally, Business in Focus contacted Lawrence Williams, a London based Consultant Editor for Mineweb. Mineweb, launched in 2000, is a web-based publication covering corporate and operational developments in the mining sector. This is what Lawrence had to say.

Business in Focus: Mine closures and cutbacks are an ongoing scenario globally, relative to the drop in gold prices, and appear to be key factors to dwindling gold ore production. Can this be attributed, in some way at least, to dwindling rich ore grades and the mining of lower grade ores that, in part, increase production costs?

Lawrence Williams: Firstly, global gold production is not diminishing – it has actually been rising despite the lower gold price, although longer term, if gold price weakness persists, production will start to fall as uneconomic mines close. The reason production is rising is that new developments already in the pipeline are still coming on stream and miners who have the capability to do so have been countering reducing gold revenues by mining higher grades of ore at the same mill throughput. This also results in a lowering of unit costs as well as an increase in actual gold production. But overall, dwindling ore grades and the dearth of big new gold discoveries will indeed likely lead to lower gold output – but perhaps not for a couple of years yet.

BIF: Would it be fair to say that even the largest global gold producers, such as Barrick and Newmont, will be feeling the pinch in terms of profits, necessitating the shutdown or cutback of high cost operations?

LW: The big gold miners have been under pressure from their major shareholders to cut costs and get back on to a decently profitable basis. This has led to a certain amount of rationalization in the sector which is already leading to either closure – or disposal to perhaps more flexible smaller mining companies – of their more marginal or loss-making operations.

BIF: How will declining gold prices impact investors and stakeholders? Will this create a loss of faith to some degree?

LW: Possibly. However, a lot of gold holders are true believers! What the lower prices will do is shake out those less firm holders. There are always many gold investors who look upon gold as catastrophe insurance. Gold exploration is still the biggest mineral exploration sector so it’s unlikely the search for new gold sources will cease to continue, particularly in the light of how few major gold discoveries have been made in the last few years.

BIF: If idled or reopened mines respond to higher gold prices, even those mines under “care and maintenance” will require years to bring production back up to pre-closure status. What would be the consequences here? Could they still survive?

LW: Some will. Some won’t. The longer a mine stays shut down the longer it will take to rehabilitate and make safe – it depends on the degree of care and maintenance and what the remaining mine life might be anyway. Some will be able to be brought back quite quickly. Others, where perhaps closure has led to structural problems – particularly underground mines – may be difficult to reopen. But if the price moves high enough even these will probably be brought back online, presuming their resources are considered sufficient in size to make it worthwhile.

BIF: For smaller mines it will be a case of “survival of the fittest.” Will we see more mergers or private equity to bring these mines back online? What will be the greatest challenge with M&A transactions?

LW: We are already beginning to see more mergers and acquisitions. One doubts private equity will be put to reopening closed down mining operations to any great extent – it’s more likely to be sought for potentially profitable new mining operations. Private equity tends to step in when the major banks’ policies preclude their lending to what is seen as a risky sector. The greatest challenge in M&A is the acquirer being able to convince the acquiree they should enter such an agreement at such diminished stock market valuations. This will likely lead to more hostile take-overs. Where cash transactions are involved, there will be difficulties raising the necessary finance.

BIF: In your opinion, will this downward trend in gold prices be long lasting, or is there hope for recovery?

LW: I think the downturn in prices may persist for another year or so but that eventually there will be a return to significantly higher prices as a shortage of gold will come to exist in the West. The Eastern nations – notably India and China, which are much more gold-oriented for all kinds of social and economic reasons – will continue to buy at high levels as their populations become ever-wealthier.

BIF: Anything that you’d like to add, from a personal perspective?

LW: Personally I think the last point is likely to be most significant for the gold price longer term. There appears to be a very large, and growing, demand for gold in the East while Western gold investors, for the most part, are much more short term holders and traders. This will continue to lead to a flow of gold from weaker hands in the West to firmer ones in the East and thus continue to deplete Western gold inventories. Asian demand is probably already currently exceeding global mined gold production so inventories are not being replenished. Eventually a shortage will develop in the West leading to a surge in prices. There will be hardly any significant new gold mining operations coming on stream to counter the eventual shortfall. The laws of supply and demand will ultimately prevail.

Even though there was over a fifty percent reduction in drilling operations in 2013 compared with 2012 statistics, consumer demand for gold reached a global high in 2013. And it appears that the consumer demand for gold is showing no signs of letting up, particularly in developed and emerging markets.

As Lawrence noted, the laws of supply and demand will dictate how the gold market plays out. Some have postulated that by 2015, if not before, the makings of a “supply squeeze” could be realized. To be sure, consumer demand in countries such as China rose to a record level of thirty two percent in 2013, while India saw a thirteen percent increase. Demand increased in countries such as Thailand (73 percent), Turkey (60 percent) and the U.S. (18 percent).

Last year was indeed a bearish year for gold. It’s been noted as the annus horribilis. Whether next year will shift in to annus mirabilis can only be left to speculation.

September 24, 2017, 8:00 AM EDT

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