A little more on the Standard Bank production prediction.
Gold price to improve as new supplies shrink
By: David McKay
Posted: 04/25/2001 06:00:00 PM | © Miningweb 1997-2001
MIAMI -- World gold mine supply is estimated to decline 35 per cent over the next eight years as the pace in gold mining expansion slows. This is according to a report issued by South African stockbroker Standard Equities which also believes that the reduction in producer supply will place upward pressure on the gold price: "The impact of the decline in world gold production will result in an increasing deficit between supply and demand which is likely to change market perception significantly, and subsequently put upward pressure on the gold price," the report says.
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The report's author, David Davis, says annual world mine gold production has reached a plateau over the last two years. A 35 per cent reduction in supply represents a decline in actual gold supply of 900 tonnes. Similarly, South African gold production is also likely to fall by some 29 per cent or some 120 tonnes of gold.
The decline is a result of the fall in the gold price which has rendered many existing reserves uneconomic and dulled the appetite for expansion. In addition, gold producers will be necessarily slow to respond to a significant supply deficit. This is owing to the time taken to bring a greenfields project from exploration to production – a process which could take five years, according to Davis.
Fresh production would also require a solid and sustained recovery in the gold price above $350 per ounce. This could take at least two years, he says.
Gold Fields Mineral Services estimates that gold production has fallen in the big four producing nations: South Africa, the US, Australia and Canada. Gold production in South Africa hit its lowest level in 45 years in 2000 at 422 tonnes. Output declines in the US was seven per cent in 1999 and two and four per cent in Australia and Canada respectively. These countries comprise 49 per cent of total world gold supply.
The move away by major gold producers from exploration to growth by acquisition continued in 1999. This is because most majors consider acquisition to be cheaper than exploration. Typical examples of recent corporate transactions is the move to Australia by AngloGold [NYSE:AU] and Harmony Gold [NASDAQ:HGMCY], as well as the purchase of the Morila and Geita gold mines by AngloGold.
In an essay on junior exploration, Paul van Eeden observes that the drive towards consolidation in the industry is also constraining new mine supply. "Due to recent mergers and acquisition in the mining industry, the bar has been raised and the major mining companies now require deposits to be in excess of five million ounces before they become excited. Perhaps, only one or two such discoveries are made in a decade," van Eeden says.
He adds that the gold industry needs to discover 80 million ounces of gold every year just to prevent it from shrinking. Shrinkage, then, appears to be likely.
South African production under pressure
According to Standard Equities the average year-on-year decline in South African gold production is 15 tonnes or 482 000 ounces over the next eight years. Davis even believes this figure could be conservative as a number of potentially long-life operations are currently running at a loss and could be closed. These mines are AngloGold's Free State assets and Gold Fields [JSE:GFI] St. Helena, Oryx and Libanon operations. South African gold output is expected to remain between 400 and 422 tonnes a year until 2002 and then fall 15 per cent over the following five years and 29 per cent over eight years.
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