News Bureau

Gold supply down by 12% in Q1

Gold supply contracted to 1032 tons! WGC

Miners supplied 764t of gold to the market in the first quarter of the year, fractionally below the 767.8t produced in Q1 2016. There were areas of growth, largely from new mines: the US and Suriname both saw increases from projects that came on stream over recent months. The additive impact from these markets, however, was offset by weakness elsewhere.

Mining lower grade ore at Mongolia’s Oyu Tolgio copper mine resulted in a gold output reduction of around 3t. In China, extended New Year holidays at some refineries and mining companies crimped supply, as did the imposition of strict environmental management restrictions: together, these two factors knocked around 2t off Chinese gold production yoy.

But by far the largest impact on Q1 mine production came from Indonesia, thanks to a more than 8t fall in production from Grasberg. Production was cut back by around 60% to match domestic smelting capacity, after Indonesia introduced new restrictions on exports of unrefined metal. Free port McMoRan – Grasberg’s operator was granted a reprieve on 21 April in the form of a six month temporary export licence. But this issue is far from resolved, and negotiations between the two parties continue.

Despite the wrangling, Grasberg is moving into a period of high grading and will ramp up production over the next several quarters. This, along with a few smaller projects coming on stream – particularly in Canada and Australia – will nudge global production higher in 2017 and 2018. But the effect will only be temporary.

Having plateaued in recent years, mine production will soon enter a period of decline. The production profile of currently operating mines shows a relatively steep drop off over the next 5 to 10 years. Even factoring in high probability projects (those highly likely to reach commercial production), the fall in production is still significant.

This is largely a consequence of sharp cuts in capital expenditure over recent years (total capex for companies in the HUI Index declined 65% between 2012 and 2016 ), as well as a lack of significant discoveries. We have seen this before: lower prices in the late 1990s and early 2000s also negatively impacted production and exploration in the years that followed.

And while there are signs of renewed interest in brown field development and extending the life of existing mines, these are not yet sufficient to offset the steep cuts in project development spending of recent years. Inevitably, the supply pipeline will be squeezed.

The speed at which production will fall is uncertain. As existing reserves are depleted, the current project pipeline will be unable to replace them fully. Over the long term, the global production profile will depend on the trajectory of the gold price and potential exploration upside, particularly the speed with which brown field exploration can be brought into production. 

What's your reaction? 0% 0% 0%