Gold is facing a “production cliff” according to National Bank analyst, Steve Parsons. He first wrote about his idea of an inevitable drop in gold production in 2013, “It’s not a matter of if or even when the production cliff will happen. It’s really a matter of how companies respond.” Gold output is scheduled to top out in 2016 if it has not already and begin a decline lasting at the very least for several years. According to Goldcorp, gold production will drop six percent in the next three years, and almost 18 percent in the next nine years.
There are several factors facing the mining industry including a limited number of new discoveries over the past decade. Companies have also deferred or canceled projects because of excessive risk. Construction costs have increased as has operating costs, and political risk is inherent in various parts of the world.
Vitaly Nesis, CEO of gold mining company Polymetal believes “It is fruitless to try to predict demand dynamics for gold - I always put my faith in a recovery driven by a reduction in supply and I believe we will see the first signs of impending recovery in the second half of this year. The fourth quarter last year was, in my opinion, the peak quarter for fresh global mine supply. I think supply will drop by 15 to 20 percent over the next three to four years.”
Kevin Dushnisky of Barrick Gold believes the production cliff is a result of extended project development timelines, and as stated earlier a lack of new discoveries. Both factors mean investors should be bullish for the medium and long-term price of gold.
The CEO of Randgold, Mark Brisow believes that “For the first time in history, gold supply into the future is under enormous pressure.” Spending on gold exploration has dramatically decreased from $10 billion in 2012 to less than $4 billion this year. Peter Hambro, chairman of Petropavlovsk believes, “There is a chronic shortage of exploration money and as usual the gold price is not acting in the way everyone thought it would do.”
Issues Facing Miners
The low price of gold has forced mining companies to take huge write-downs and impairment charges. Projects once thought to be economically viable are no longer based on the current price of gold. Miners have been forced to reconsider their spending plans. Many projects have either been delayed, postponed indefinitely, or completely canceled.
Instead of gambling on the remote possibility of discovering large, high-grade ore bodies, miners have decided to spend cash on expanding existing deposits, enhance efficiencies or even explore acquisitions. Barrick Gold in Canada is in the process of selling off its non-essential assets while Minjar Gold of China is bidding for the largest mine in Australia.
Another issue facing miners is the declining grades on their gold reserves, which have fallen over 50 percent since 2005. A grade is the proportion of gold found in the ore of a mine. The extended period of lower gold production will have three distinct phases.
Phases of Lower Gold Production
The first phase is closure. There are two types of closure, full and partial. The full closure is ceasing all mining operations. This type of closure could be temporary with miners waiting for gold prices to go higher. Some mines mix lower-grade ore with high-grade ore. The lower the price the less likely miners are able to afford this type of operation. If the miners increase the production of high-grade material the life of the mine will be greatly decreased. Instead, miners will stop producing using the lower-grade material to reduce their production costs. Although this helps the miner with profitability, it lowers overall production.
The next phase of lower gold production is a delay in development. Mining companies like most publicly-traded companies must satisfy investors and let them know of major operational changes. Since 2013 there has been an increase in announcements of suspending development plans including the expansion of existing mines as well as new mines.
Finally, there will be insufficient product backfill. For production levels to remain constant new sources of gold must replace those mines that are depleting or completely closing. The decline in production would cause an economic imbalance. This lack of gold for replenishing production levels is bullish for the price of gold and good for investors.
Some projections have the world running out of new gold to mine by 2035. Not that the gold will be completely gone on Earth, but only available in such small quantities that it will no longer be cost effective to mine. That is on Earth, but there could be gold in the heavens above.
Gold in the Stars
The asteroid is known as 2011 UW158 passed by Earth in 2015. The rock from outer space is more than half a kilometer long and could contain between $300 billion and $5 trillion in precious metals. The bad news (or good news) is that the asteroid was 1.5 million miles away from our planet. That is roughly six times further than the Moon. Astronomer Bob Berman believes that there could be 90 million metric tons of precious metals based on the light emitting from the asteroid.
The idea of mining asteroids is not impossible. Planetary Resources, an astronautics company based in Redmond, Washington, launched a 3-month expedition to test the technology for extraterrestrial prospecting. Planetary Resources is not alone. The Rosetta spacecraft from the European Space Agency was able to land on a comet in 2014, proving that exploration of asteroids could be possible.
Still, think asteroid exploration is a long way off? In 2015, President Obama signed into law the US Commercial Space Launch Competitiveness Act. The law gives the right to US citizens to own asteroid resources they obtain and encourages the commercial exploration and use of resources from asteroids. Eric Anderson of Planetary Resources believes, “This legislation establishes the same supportive framework that created the great economies of history and will encourage the sustained development of space.”
Are we running out of gold on Earth and ready for Buck Rogers in the 21st century? While we may never run out of gold on Earth we are most likely running out of mineable gold. Even though exploration of asteroids in outer space seems more like science fiction than reality, the truth it is not in a galaxy far far away but in the not so distant future. The reality here on Earth is that the lower production of gold for the next few years is good news for investors.