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Gold Mining "Hurt Long-Term", Output "Peaking in 2014"

Gold mining producers cutting exploration, M&A spending as profit margins shrink...
 
GOLD MINING output worldwide is set to peak and then "plateau" in 2014, according to the leading data analysts, as today's lower prices force producers to cut exploration spending in a bid to boost profit margins.
 
"It seems inevitable," says the new Gold Survey 2014 Update from Thomson Reuters GFMS, that the mining industry's response to 2013's gold price crash "will be detrimental to mine supply levels in future years."
 
Forecasting a 10% drop in the average market price to $1270 per ounce for full-year 2014 (currently at $1290), "The mining sector is increasing production this year," says the consultancy, "with a number of important projects coming into production and/or ramping up to full capacity, having benefited from investment flows in earlier years when prices were much higher."
 
But new investment is now being cut back, meaning that "longer term, the production profile is likely to come under pressure" with 2014 marking what Thomson Reuters GFMS calls "a cyclical top for mine production."
 
Over the first half of the year, global gold mining output rose 4% worldwide from January-June 2013, led by increases from China, Australia and Russia – the top 3 producer nations.
 
Gold mining output fell however in the next 3 major producers – the United States, South Africa and, most sharply, Peru. There, the giant Yanacocha project, the world's biggest operational gold mine at its peak a decade ago, saw the quality of gold ore drop 65% from a year before.
 
Better "husbandry" and falling energy prices mean the average cash cost of mining 1 ounce of gold fell 6% by mid-2014 from a year before, Thomson Reuters GFMS explains. But thanks to the slump in world market prices, the industry's basic profit margin has fallen 25% year-on-year, it says.
 
Attempting to cut costs further, the gold mining industry's "closures or suspensions have so far been limited to small or ageing operations," the report says. But there have also been "deferrals of major development-stage projects", because the last "turbulent year" in precious metals at one point saw gold's market price dip below the mining industry's average cost of production when exploration and new development expenses are included.
 
In the stock market this has also led to "a market sell-off that has severely depressed mining valuations." Mergers and takeovers remain "anemic", with no "blockbuster consolidation plays" despite continued approaches from Newmont – the world's No.2 gold mining company – to the world No.1 Barrick aimed at saving $1 billion per year across their operations in Nevada, USA.
 
Today's lack of corporate activity in the gold mining  sector, says Bernard Dahdah at French investment and bullion bank Natixis's London office, contrasts with the "mine acquisition frenzy" of the decade-long bull market in gold prices. Then major companies were "typically purchasing mines at the higher end of the cost curve." Miners also failed to protect themselves against any drop in prices, remaining "unhedged" after finally closing in 2009-2011 the huge forward sales made at prices 80% lower at the turn of the century.
 
Gold producers, says Dahdah, "are now resorting to consolidation at the lower end of the cost curve. Exploration budgets are also being cut back."
 
Cost-cutting across the base metals sector is being driven further by slowing global demand, reports specialist news and data provider Platts.
 
"Companies are not only becoming leaner and meaner because the old regimes... became too profligate when commodity prices were high," writes Paul Bartholomew, Platts' managing editor for steel in Australia. "Rather, they are responding to a slowing China and subdued global economy."

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