The rate at which new gold deposits are being discovered is declining by a rapid rate, according to new data out today from research group IntierraRMG. In light of gold price weakness so far in 2013, this trend is unlikely to change.
Miners need the incentive of a rising gold price to step up exploration investment; if the price is falling then the focus will be on producing assets and optimising cash flow. Exploration won't dry up completely, yet the near-term outlook for the grass roots side of the industry remains challenged.
The following charts show how the gold price has delivered significant gains since 2001, yet run out of steam in the past year. (Right-click to enlarge each chart and open in a separate window/tab).
Juniors are finding it hard to raise cash amid weak capital markets. Seniors are under pressure to improve return on investment which means they are more likely to focus on operational efficiencies and streamlining their portfolio than pumping lots of money into speculative projects.
There are exceptions to this rule, such as mid cap silver and gold producer Hochschild Mining (HOC) which has bucked the trend of buying projects over the past few years to develop a strategy of creating value through exploration. Yet we believe the broader industry is likely to prioritise brownfield work – finding gold on land near an existing deposit to act as feed material for an existing processing plant – rather than greenfield which is looking for mineralisation in unexplored virgin territory to find tomorrow's big new gold mine.
IntierraRMG's research (right-click to enlarge image and open in separate window/tab) shows the past decade is a tale of two halves. The periods between 2003-2004 and 2007-2008 saw the discovery of 400 million ounces and 390 million ounces respectively. The latter had the highest average grade at 2.65 grams per tonne.
The quality and quantity of gold discoveries has deteriorated considerably since 2008. The worst result was 2011-2012 where slightly less than 225 million ounces were found at just 1.17 grams per tonne gold grade. IntierraRMG reckons the situation will only get worse, given the drop in global drilling activity.
Macquarie bank reckons mine production will drop from 2,847 tonnes in 2012 to 2,815 tonnes this year. It then sees global mine output staying flat at 2,800 tonnes for the next three years. It sees falling scrap supply between 2013 and 2015. What's interesting is that Macquarie sees a balanced market for the near-term with demand dropping in line with reduced supply in both 2013 and 2014. It reckons that demand will start to pick up from 2015 with extra scrap metal providing the additional supply – not mine production.
It is worth remembering that it can take up to 10 years from discovering mineralisation to having a producing mine. Therefore the drop in gold discoveries since 2008 may not start to truly impact supply trends until 2018. There seems to be little worry in the market today about a potential gold supply crunch, particularly as scrap plays a big role in the supply chain, but it will certainly become a topic of debate.
And here's the reasons why a supply crunch could be on the cards. Existing mines are being depleted. The industry will soon pay the price for developing low-grade deposits as profit margins are squeezed to oblivion: costs are rising and the gold price is falling. Resource nationalism means that it is taking much longer to bring new deposits into production. There's also growing environmental concerns, labour demands and pressure from communities for greater compensation for allowing a mine to be built on their doorstep – all of which could deter progress in developing new mines. Add in the lack of new discoveries and you have a problem waiting in the wings for the gold industry.
(Picture courtesy of African Barrick Gold)