Price Drop Accelerates Gold Mining "Production Cliff"

Forecast of 2017 "cliff" for major gold producers brought forward by ore-grade switch...

 

GOLD MINING faces a "production cliff" sooner than previously thought, according to minerals analysts, thanks to 2013's sharp drop in prices.

 

Gold mining output, especially amongst major producers, was set to fall sharply from 2017, said mining analysts at National Bank Financial in Canada earlier this year. Because new discoveries of large deposits have badly lagged the rate of output, risking a "cliff" for gold mining production as older projects end their life.

 

Global discoveries of large, cost-efficient gold mining deposits have lagged the industry's output by 25% over the last 20 years said separate analysis from fellow Canadians SNL Metals Economics Group last month.

 

NBF's production cliff timeline, however, is "now accelerating" it said Sunday, thanks to changes being forced on miners by the lower price of gold in global markets.

 

Most particularly, lower profit margins mean the focus will move to mining higher-grade deposits, where the quantity of gold in each tonne of earth is greater. The changes needed for this switch should kick in from the middle of 2014, says NBF's weekend report, and "the application of higher cut-off grades, where the deposit allows it, should finally position companies for margin expansion and claw back some much-needed goodwill with investors."

 

"The implication of higher cut-off grades is less production," notes specialist website MineWeb. And "with a move to raise cut-off grades," says NBF, "we could see an acceleration of this [production cliff] thesis starting in 2014, prior to the market drop-off in 2017 [and beyond]."

 

More immediately, "We doubt that modest production cuts will do much to support the gold price in the medium term," say analysts at brokerage Jefferies Bache. "Gold has a far larger and more liquid above ground stockpile than most other mined commodities.

 

"Therefore, the cost of [gold mining] production is not as relevant in determining the commodity price as it might be in say copper.