Can Informal Production Help Avoid Peak Gold?

The outlook for gold mine supply remains finely balanced, with global production forecast to increase slightly in 2018 to 3,339t (+35.6t, 1% y/y), with an additional 17.8t increase expected in 2019. In evidence as to how finely balanced the situation is, a single operation, Grasberg, is expected to contribute the majority of the 2018 increase, with an additional 26t of gold of gold output versus 2017, produced from the final open-pit cutback, says Charles de Meester, founding partner of Metals Focus.

Annual average growth in mine production of 3% over the current decade has been supported by increases from nearly all of the major producing countries, the exceptions being structural declines from South Africa and Peru. These losses were offset by increases from China, the largest producing country and main growth driver of the past eight years, which added 88.3t from 2010-17, as a handful of large indigenous mining companies consolidated and expanded.

The outlook for the next three years presents a more complicated picture to interpret, with contrasting fortunes ahead for large components of the global mine supply mix. Since mid-2016 China has entered a period of production decline, as stricter environmental regulation takes effect. Likewise production from the United States and Indonesia is set to decrease as operations age and grades continue to fall. On the upside, growth will continue from Canada, Russia and Australia, primarily from greenfield project development. Much also depends on developments in smaller producing countries in Africa, the CIS and South America. These regions are characterised by higher risk of disruption from community opposition, conflict or political intervention.

The major gold miners are currently constrained by shareholders' insistence that they reduce debt burdens and do not commit to large project developments, so little or no growth is expected from the larger players over the next three years.In fact, declining production and loss of market share has been an ongoing theme for the top ten major producers over the last decade; in 2010 34% of global supply came from the top ten; producers in 2017 this had fallen to 28%. This trend is set to continue with many of the top 10 miners prioritising shareholder return over production growth, resulting in little prospect of increased output over the next two to three years. Barrick and Newmont, the two largest producers, are currently budgeting for a 28.7t and 12.9t respective decrease in annual output by 2020. Polyus is expecting the greatest increase, guiding for an additional 19.9t/y by 2019, driven by brownfield expansion and the ramp-up of Natalka.

Despite this, counter intuitively, the global gold mine project pipeline is healthy, as smaller mining companies with the high quality projects have been able to secure financing and progress project development over the last few years, despite the difficulties faced by their larger peers. Although still well below the 2012 peak, the PDAC State of Mineral Finance 2018 report estimates that global mining finance activity was up 61% y/y in 2017. Notably, of the 40-odd greenfield projects currently under construction/commissioning in our global mines database, only one, Goldfields' Gruyere JV belongs to a top ten miner. The population includes four other >6 t/y projects due to enter production this year or next; Lundin Gold's Fruta del Norte (11.0 t/y), Agnico Eagle's Meliadine (9.7 t/y), Lydian's Amuslar (7.0 t/y) and Nordgold's Gross (6.2 t/y).

Another major contributing factor in gold mine supply growth has been increased production from the artisanal/small scale mining (ASM) sector. ASM production has grown as a result of increased gold prices and the hardships faced by rural economies in developing countries. The Intergovernmental Forum (IGF) reports an estimated 40.5m people directly engaged in ASM mining up from 13m in 1999. As developing country populations continue to grow and subsistence farming remains economically marginal, gold production from ASM is likely to become more significant over the longer term.

Source: Charles De Meester writing in Precious Metals Weekly, a newsletter published by Metals Focus, www.metalsfocus.com, one of the world's leading precious metals consultancies.