GDR iv
Gold & Supply
Eric Hommelberg
April 18, 2005
Gold & Supply is chapter IV of the Gold Drivers Report and
has a strong focus on a declining Gold supply coming years. This
is important since many analysts are pointing towards lower Gold
prices due to an expected increase in world gold production.
Jeff Christian of the CPM group said on ROB TV late March:
World gold production levels
are going up and will bring down the price of gold should it
rise.
Well, maybe Mr. Christian is
right but I simply disagree and here's why:
Gold production is approximately
2500 ton a year nowadays and projected to fall down to 2000 ton
a year this decade. Alarm Bells were being raised everywhere
since 2002 but it took a long time before falling Gold production
got some media attention. Nevertheless it seems that the awareness
regarding a decline in Gold supply is growing. Here's what Mineweg
reported late 2004:
The pressure is on for physical gold.
London (Mineweb.com), Nov 25, 2004
"Demand is growing and
production is falling. That is according to the latest gold supply
and demand trends published by the World Gold Council covering
the third quarter released this morning (November 25) and which
show a contraction in supply against growth in demand."
"The figures, compiled for the World Gold Council by GFMS
Ltd indicated that supply contracted sharply during Q3, dropping
by 22.4 percent to 828t, against 1066t in the third quarter of
last year." END.
The fact that a declining Gold
supply could have a serious impact on the price of Gold coming
years is gaining more credibility lately. Dow Jones News Service
quoted Merril Lynch Gold fund manager Evy Hambro on falling mine
output and its impact on the Gold price.
Dow Jones News Service
Falling mine output over the coming years
Wednesday, November 10, 2004
SYDNEY -- Merrill Lynch Investment
Managers have a favorable outlook for gold, underpinned primarily
by emerging pressures on supply, a leading member of the firm's
London-based natural resources team said late Tuesday.
Amid "relatively static"
demand, falling mine output over the coming years and the potential
for a reduction in European central bank sales stand to prolong
the rally in U.S. dollar gold prices, Merrill gold fund manager
Evy Hambro explained during a visit to Sydney. END.
Already in 2002 a study published
by Beacon Group Advisors forecasted a decline of Gold production
of 35% for the following 5 to 8 years. (see graph below)
The reason for this was a lack
of Exploration during the 1997 - 2002 period. During this period
Exploration budgets had been cut by 67% simply due to the fact
that Exploration programs weren't profitable with a Gold price
below $350/ounce. No Exploration means no new Gold deposits!
It's as simple as that!
Now let's focus on the Alarm Bells being raised since 2002:
April 2002: AngloGold
AngloGold also sounds alarm on Gold supply!
Gold Mining companies have warned that supplies of the precious
metal are poised to fall sharply. The latest producer to sound
the alarm bell that the industry was running out of Gold faster
than it could replace it was world number two miner AngloGold,
which predicted that the big discoveries of the past 20 years
would run dry.
Sept 2002: Denver Mining
Conference.
Gold Executives this
week gave anecdotal and numerical evidence of trends the industry
has long hoped would boost what has been an ailing industry.
Those trends include steady drops in yearly global output
of Gold as Miners merge or "mothball" properties that
can't turn a profit at Gold's current price of $322 an ounce!
Sept 2002: CBS Market watch.
Global Gold output is seen falling 3% this year. It's biggest
drop since 1976
Sept 2002: Reuters
Gold output on slippery slope. Production levels at Gold
Mines might not be sustainable because of depleted reserves at
mature North American Mine operations and a fall on new mines
on steam.
October 2002: The Australian Institute of Geoscientists.
The decline in Australia's Gold Industry continues.
Declining Exploration in Australia's Gold Industry is continuing
to hurt production, with Gold dropping a further 8% in the year
to June 30.
END.
Then in March 2003 the strongest warning regarding dwindling
Gold reserves came from Barrick's Exploration VP Alex Davidson
who said:
"Big mining companies
need to spend more on exploration, or else, at current annual
production rates, reserves will be depleted in 10 years, he said.
It can take six to eight years between making a discovery and
starting mine production, and "we're not currently funding
exploration at a level required to replace reserves," Davidson
said."
A declining gold production
can't be reversed easily:
Newmont president Pierre Lassonde said:
"The 20-year bear market
in gold has weeded out marginal gold producers and significantly
curbed exploration and production.." "If gold was $1,000
an ounce, it still takes four to seven years to open a mine,"
END.
Barrick CEO Greg
Wilkins said more or less the same, he said (Nov 2004):
"The average lead time
for a large discovery to go on-stream with production was around
five to seven years but that seven to 10 years was probably more
realistic..' "The industry isn't going to be able to respond
immediately to higher gold prices. It is going to take a long
time." END.
Trevor Steel, partner at Baker
Steel Capital Managers told delegates at a two-day Euromoney
gold seminar recently:
"The way I like to think
of it is that the gold industry is in overdraft. It's been relying
very much on discoveries that were made many, many years ago
and it is not replacing the reserves it is mining every year,"
END.
During 2004 it became clear
that the alarm bells being raised since 2002 should have been
taken seriously since the gold producers were struggling indeed
in order to keep up with production, the following headlines
tells it all:
Thursday February 12, 2004
AngloGold saw reserves fall by 9.2-m ounces last year
AngloGold's Geologists failed to replace all the ounces it produced
last year.
Monday February 16, 2004
Ashanti Announces Gold Production Lower Than Forecast
Tuesday March 2, 2004
SA gold output 4,9% lower in 2003.
Friday March 12,
Gap in Gold Production Looming
Friday April 2, 2004
Harmony Gold cuts production by 6%
Sun May 23, 2004
Aussie gold output hits record low
Friday June 18 2004
South African gold production tumbles 8.3% in first quarter
Thursday July 8, 2004
Gold supply down in Peru by 6.3%:
Wednesday July 7, 2004
Barrick Gold production declined to 1.28 million ounces in the
second quarter from 1.47 million ounces a year earlier
Tuesday August 24, 2004
Australian gold output falls 16% in June qtr compared to June
qtr 2003
Monday September 13, 2004
Gold miner Cambior Inc. (CBJ.TO: Quote, Profile, Research) on
Monday said it expects gold production will decrease over the
next four years
Thursday December 09, 2004SA's gold production down
Johannesburg - South Africa produced 85.7 tons of gold in the
third quarter of 2004, the Chamber of Mines said on Thursday.
Ah you'll say, that was 2004 so the worst about declining gold
supply should be over right? The experts are pointing towards
lower Gold prices due to an expected increase of Gold production.
At least that's what they want us to believe. So let's see if
that's the case indeed and what good news we saw so far regarding
gold supply this year:
Straight from the start of 2005 a bleak picture was painted for
world's biggest Gold producer South Africa:
Production decline 33% over decade
January 19, 2005
Johannesburg: Gold output in
South Africa is expected to fall slightly this year, but a bigger
slide is threatened if the rand extends its bull run, a government
expert said yesterday.
SA gold production could nearly
stabilize this year with a buoyant dollar gold price and a stable
rand, Alex Conradie, chief mineral economist with the Department
of Minerals and Energy, told Reuters.
The country has seen production
tumble by over a third in the past decade as high-grade mines
run out of ore and firms have to dig deeper to find new deposits.
END.
The message is loud and clear:
High Grade Mines are running out of Ore!
But wait, higher Gold prices will bring some mothballed facilities
on steam right? Well, higher Gold prices in US$ yes, higher Gold
prices in ZAR no! Over the last three years, the price in rand
of a kilogram of gold has dropped 22% to reach 84,990 rand ($1=ZAR6.228)
a kilo. Rand strength has outpaced the rise in the U.S. dollar
gold price, explains Williams de Broe Mining analyst Alex Wood.
So while South African miners have been paid more for their gold,
their costs have grown proportionately faster -- erasing gains.
So what consequences could
that have for the South African Mining industry when the high
grade mines are running out of ore? Sure it pushes the SA Gold
companies into survival mode:
S Africa Gold Companies Pushed Into Survival Mode
By Jackie Range
Dow Jones Newswires
Monday, March 28, 2005
LONDON -- Drilling deep underground
in dark, hot, and wet conditions, South Africa's gold miners
may have little idea their industry is facing its biggest challenge
yet miles above their heads.
While rival companies with
dollar-based costs bask in a high gold price -- in December it
reached a 16-year peak -- South Africa's gold miners have been
hit by the rand's strength against the dollar and rising costs.
Taking into account all their costs, half of South Africa's gold
mines are currently unprofitable.
As a result, gold industry executives are taking some drastic
steps to give their business a future. Consolidation, diversification,
cost-cutting, mining higher grades, and closures are all on the
menu.
"We're all playing a sort
of game of last man standing," said Mark Wellesley-Wood,
chairman of DRDGold Ltd. (DROOY), a Johannesburg-based junior
gold miner with assets in South Africa, Papua New Guinea, and
Fiji.
The South African gold industry
is in terminal decline. In 1970 it produced 70% of the world's
gold, but by 2003 it accounted for just 14.5% of global output.
END.
No please digest this carefully,
gold industry executives are taking some drastic steps to give
their business a future. They're openly talking about cost-cutting,
mining higher grades and closures. Again, mining higher grades
will be a difficult endeavor since the high grade mines are running
out of ore. Please don't think that these alarm bell aren't serious.
Durban Deep proves that point, they're just doing what they said
they would do if necessary:
S.Africa's DRDGOLD shuts North West mines
Tue Mar 22, 2005 11:20 AM ET
JOHANNESBURG, March 22 (Reuters)
- Struggling South African mining group DRDGOLD (DRDJ.J: Quote,
Profile, Research) has shut its loss-making North West mines,
slashing production by a third and putting 6,500 people out of
work. END.
Now when the high grade mines
are running out of ore and closures are the tune of the day,
what would you think will happen with SA future Gold production?
As Dow Jones Newswires reported:
The South African Gold Industry
is in terminal decline. END
The end of the decline is nowhere
in sight. Mineweb reported on April 11:
South African gold production fell to 342.7 tonnes last year,
the lowest in 73 years.
"JOHANNESBURG (Mineweb.com)
-- Uncontrollable costs are adding inordinate pressures on South
Africa's gold industry, which has accelerated the demise of older
shafts, says the South African Chamber of Mines. "
"There are no signs that the rate of decrease in production
may be levelling out as the biggest tonnage fall came in the
second half of 2004, where 20.2 tonnes less gold was produced
compared to the last six months of 2003. "
"The Chamber says that because of the cost pressures and
the lower rand gold price, half of South African gold production
is either marginal or mined at a loss. "Some 10 mines, employing
90,000 people and accounting for about 50% of production, are
marginal or loss-making at the current price (excluding capital
expenditure)," says the statement. " END.
To make things even worse is
that gold mines typically do not mine all out their 'ore reserves.'
Here's an important comment which I received from a former Senior
Exploration Geologist of Barrick Gold
Hi Eric:
I'm a geologist friend of Bill
Murphy, working in northern Nevada.
Good article. One other point
that people in general are unaware of, and most analysts, is
that gold mines typically do not mine out all of their "ore
reserves." Late in the life of mines, the typical case is
that for a variety of reasons ("high-grading," gold
price and labor cost fluctuations, etc.) the mine shuts down
early, with a large amount of "reserves" still showing
on the "books." A good recent case in point was the
Homestake Mine in South Dakota, which was shut down with a large
base of ore "reserves" (millions of ounces) still on
the books. Many mines start up very slowly but come to an end
falling off a cliff and hitting the ground with a resounding
thud! Watch out for South Africa, in this regard.
Regards, Rick Redfern
Ok you'll say but what about
higher Gold prices? Wouldn't that solve SA's production worries?
the answer is NO!. As Pierre Lassonde said:
"If gold was $1,000 an
ounce, it still takes four to seven years to open a mine,"
END.
echoed by his colleague Greg Wilkins:
"The industry isn't going to be able to respond immediately
to higher gold prices. It is going to take a long time."
END.
That the industry isn't able
to respond immediately to higher Gold prices seems to be logical
when you consider the following:
We just saw that in order to survive the Gold producers (especially
the SA ones) are mining the high grade ore bodies since the low
grade ore bodies aren't profitable to mine at current Gold prices
and therefore qualified as being 'waste.' Now what happens if
the Gold price starts to rise? Of course the Mine's Manager's
first priority is to extract the extra ore which was 'waste'
just a short time ago. What does it tell you? It tells you that
the mine's mill recovery rate will drop. OK, but what does that
mean? It simply means that mine output will drop since the rated
mill capacity doesn't change overnight. This mechanism is described
in detail in the comments below which I received from a geology
dr who is president of a junior exploration company.
Eric,
I am the president of a junior exploration company. I have been
in the business for over 30 years. I have a Bachelor degree in
engineering, a Master's degree and a Doctorate in geology. I
have worked in government, large and small companies.
I would like to bring to your attention one point that I feel
is critical to the upcoming decline in gold production.
All mines are designed for a specific rate of production in tonnes
mined and milled, not in ounces of gold produced. All mine's
costs are measured per tonne of production, not in ounces of
gold output. These mines optimize for longevity, not profit.
What this means is as follows:
1. A mine is not homogeneous. It has reserve blocks that range
from low-grade (for example 1 gpt), up to high-grade (for example
30 gpt). Unfortunately, there are generally many more low-grade
blocks than there are high-grade blocks.
2. A mine's operating structure is generally set at initial design,
in that it has a rated mill capacity of 100, 1,000, or 10,000
tonnes per day. Its cost structure is likewise set by design
in that a tonne of ore costs $x to mine, $y to process with $z
for G and A. Therefore, for example, a 1,000 tpd mine with $x+y+z
equal to $100 per tonne must process ore of that minimum value
to break even. No operator will survive for long processing sub
$100 ore. At US$330 per ounce and assuming a 90% recovery from
the mill, the minimum profitable grade is close to 13 gpt (or
near 1/3 of an ounce per tonne). As such, the operator will optimize
by mining from various orebodies and stopes to mine as much as
possible above the 13 gpt cut-off. Rock with grades of 8 gpt
are waste. Daily production might be economic down to as low
as 300 ounces per day (1,000 tpd at 1/3 per ounce x recovery).
As the gold price moves to say $420 per ounce, few of the mine's
costs change, but now the revenue is 30% greater. Consequently,
the Mine Manager's first priority is to extract the extra ore
that was a short time ago, waste. The cut-off or minimum grade
mined goes from 13 gpt down to 9 or 10 gpt, so the mine's 1,000
tpd output now drops from 300 ounces per day to 280 ounces per
day.
All gold mines operate this way! So as the price of gold goes
up, primary mine production drops. The higher the price of gold,
the grater the drop in primary mine production. There will be
some mothballed facilities brought on stream, but the start-up
capital these require generally makes these slow to get started.
The same is true in a falling gold market. Primary gold production
initially increases during declining gold prices as operators
"high-grade" to remain profitable.
Just some comments that are relevant. END.
Conclusion: as the price
of gold goes up, primary mine production drops
(Of course Gold production
will pick up steam later on with consistently higher Gold prices
but as explained before, this process will take many years.)
Industry consultant Ralph Bullis is worried about a drastic decline
in Gold production as well. Bullis fears that the very large
Gold producers won't even survive at current extraction rates
over the ... next five to 10 years. His calculation is straight
forward, he says that the top 5 Gold producers are each pulling
between 3.5 million and 7 million ounces out of the ground every
year. In order to keep up with the current production rate the
miners need to replace their mined-out reserves through Exploration
. But that's exactly the problem. In order to replace 3.5 - 7
million ounces of Gold each year you'll have to find a major
world class gold deposit ( > 5 million ounce) each year which
is highly unlikely. Bullis refers to the U.S. Geological Survey's
database of global gold deposits and notice that of the 792 discoveries
listed of greater than 100,000 ounces, only 6 percent contained
5 million ounces of gold or more. This is in line with earlier
comments from Barrick Gold Vice President Exploration Alex Davidson
who said that since 1999 only a very few world class gold discoveries
have been made.
Bullis goes on and says that even if a big discovery is made,
it can take anything between three and 10 years to permit a mine
in Canada and the United States, prospective areas where the
major miners are looking for gold. This is in line with earlier
comments from Piere Lassonde and Greg Wilkins who made it clear
that the Gold Industry isn't going to respond immediately to
higher Gold prices.
(Ralph Bullis was Exploration Director of Echo Bay Mines for
more than a decade and was a member of the Canadian Institute
of Mining committee, which helped set up guidelines on how to
estimate mineral resources and reserves)
Producer de-hedging
Producer de-hedging is another factor which contributes to
a decline of available mine supply. Producers turned to net de-hedgers
last year and will continue at the rate of 300-400 tonnes a year.
Although many analysts argued that producers would be stepping
up their hedging activities again because of the rise in POG,
exactly the opposite happened. Gold companies only increased
the speed of de-hedging and thereby reducing the net supply even
further.
Hedging died when the King of Hedgers Barrick Gold gave up their
favorite Hedging game. They announced last year to stop Hedging
and said that they won't do it no more for the next ten years.
Barrick Gold terminates its Hedging program
LONDON - In what had every appearance of being a damage limitation
exercise, Peter Munk, chairman of Barrick Gold, made an unscheduled
return to the Gold Investment Summit here to announce his company
had given up hedging - and would do no more for the next ten
years. END.
Would do no more for the next ten years, maybe they're
bullish on Gold?
The table shown below says it all, mine supply is going down,
de-hedging is picking up steam . Mine supply 2004 compared to
2003 is down 5%. When taken into account the reduced official
sector sales and producer de-hedging as well we'll see a total
drop in Mine Supply of 15%.
source: World Gold Council
It should be obvious that no
matter what the Gold price does in short term, Gold production
is going down coming years thereby adding pressure on a tight
physical Gold Market.
Highlights:
- Mine Supply 2004 down 5%.
- South African Gold Industry
is in terminal decline.
- High grade Mines are running
out of ore.
- If Gold were $1000/oz, it
still takes four to seven years to open a mine.
- The Gold Industry isn't going
to be able to respond to higher Gold prices. It's going to take
a long time.
- Rising Gold prices put an
additional short term pressure on Mine Supply.
- Producer Hedging is dead since
Hedging King Barrick announced to do no more hedging for the
next ten years.
- Industry consultant R. Bullis
fears that the very large Gold producers won't survive at current
production rates over the next five... ten years.
April 15, 2005
Eric Hommelberg
email: ehommelberg@golddrivers.com
website: www.golddrivers.com
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