Gold Mining "Set to Shrink", Hedging Eyed

Gold mining bosses see new projects delayed or cancelled, plus a possible return to gold hedging...

 

The GOLD MINING industry is set to shrink following the recent drop in prices, according to a major miner's CEO.

 

The plunge may also force some major gold mining firms to begin hedging their production too, warn analysts, borrowing gold to sell it today and lock in current prices.

 

"There's a dearth of exploration projects, the industry is struggling to replace what it mined," says Nick Holland, CEO of South Africa's Gold Fields, the world's 8th largest gold mining company.

 

"[Now] projects are either being deferred or cancelled in many respects," Holland told MineWeb this week. "So I think the industry is going to shrink further."

 

Raising finance is also becoming an issue for the industry, after rising prices encouraged net debt to rise 10-fold to more than $21 billion amongst the top 55 gold and silver mining firms, according to analysis from BMO Capital Markets.

 

Looking forwards, "If it's cheaper to hedge than to issue paper [ie, shares] at deep discounts, then it makes sense," Bloomberg today quotes Mark Bristow, CEO of West African miner Randgold Resources.

 

Russian miner Petropavlovsk has already hedged 70% of its next 12 months' gold production.

 

Selling future production for fear of further drops ahead would be unpopular with gold mining shareholders, analysts say. After leading gold hedging at the turn of the century, gold mining giant Barrick took a $5.6bn hit in the third quarter of 2009 alone to buy back its hedges at ever-rising prices.

 

Barrick may be forced to hedge again, reckons Julius Baer Group analyst Philipp Lienhardt. Because simply slashing costs – and deferring new projects – "might not be sufficient given the recent acceleration in the correction of the gold price."

 

Shuttering or cancelling newer projects could prove good for the Gold Mining industry long term, says Holland. Because "a lot of the marginal production shouldn't really have been brought into play or built" during the boom in gold prices of the last decade.

 

"We'll get more supply discipline into the gold industry over time."