Consultancy company Fitch Solutions believes the gold mining industry will remain fragmented, with the top five companies producing just one-fifth of global output.
Despite the company’s expectation of a slight rebound in prices, it stated in its latest ‘Outlook for gold miners’ report, published on Tuesday, that it expects gold miners to remain committed to cutting costs and capping expenditures.
Among a number of strategies that miners will follow is the mitigation of risk by entering into joint ventures (JVs) and investing mostly in brownfield projects.
The report further states that the global gold industry will retain most of its existing characteristics and strategies this year, its fragmented nature among the most notable, with the enlarged Barrick Gold, Newmont Mining, AngloGold Ashanti, Kinross Gold and Goldcorp remaining the largest producers, but only accounting for one-fifth of global output.
The remaining global output will be produced by a myriad of junior miners.
Additionally, Fitch believes the slight rebound in prices that is expected this year, will boost the incomes of smaller players, while majors with substantially lower costs of production will increase their profitability.
The consultancy forecasts gold prices to average at their highest level since 2013, this year, at $1 300/oz, even though the gold mining sector saw lacklustre gold prices and a dearth of new mining projects in 2018.
Nevertheless, the report notes that most major miners’ cash costs of production remain below $900/t, which keeps the industry profitable.
However, in spite of the likely pick-up in earnings growth in the 2019 financial year, Fitch expects companies to remain committed to spending cuts in an effort to reduce debt loads and continue to pursue a strategy of improving both operational and cost performance.
Capital expenditure estimates for this year indicate that although gold companies may have turned a financial corner in 2016, spending will not return to the heights of the past decade, the report says.
Fitch expects priority to be given to reinvestment in brownfield assets rather than the development of greenfield projects.
Meanwhile, with falling reserves globally and rising costs of gold exploration, mergers and acquisitions (M&A) have become cheaper than expanding reserves of gold through exploration.
Fitch expects more M&A activity to filter through the industry, especially following the Barrick/Randgold merger, which was completed this month, which it believes has changed the dynamics of the gold industry by creating “the largest gold mining company in the world” with the greatest concentration of tier-one gold assets in the market.
The merger follows earlier M&A in the gold space in 2018, albeit much smaller in scale, including Alio Gold’s $128-million acquisition of Rye Patch Gold.
During the bear market of 2012 to 2016, most large gold companies cut exploration budgets and small explorers had difficulties in raising cash.
During that period, most easy-to-mine gold deposits had been acquired, leaving more remote, deep underground, and expensive-to-extract mines in the market today.
As a result, Fitch states that risk aversion and risk sharing will remain the rule of thumb.
“We expect JVs to continue to dominate the industry going forward. The gold resource industry suffers from significant risks, including resource nationalism, labour strikes, extreme weather and increased environmental regulation, which make risk-sharing very important,” the company states.
It explains that senior gold miners will continue to prioritise risk mitigation this year and beyond, in terms of both political and financial risk, which will result in project development in developed markets and JV partnerships among top firms.
Additionally, Fitch expects major gold miners to continue operating in low-risk countries, in order to avoid operational halts from political events or a sudden change in mining regulation.
“The expensive nature of gold mining makes operating in countries with poor policy continuity highly risky,” the company says.
Meanwhile, investing in technology will remain a key priority for further efficiency gains.
Going forward, Fitch notes that gold industry leaders will also prioritise technology to remain competitive and to better withstand price volatility.
The acceleration of technological integration in the gold mining industry will widen the gap between the top low-cost majors and junior miners, although juniors will increasingly
catch on the trend, Fitch pointed out.
“Investing in technology can help realise further profits and extend mine lifespans, such as through augmented reality that allows miners to safely explore deeper, high-grade deposits at mines facing declining ore grades,” the report says.
However, improving supply-chain transparency will become necessary moving forward.
According to the report, the gold industry will remain a target for regulatory and social scrutiny. As is the case in the cobalt and diamond industries, the gold industry is also challenged by illegal mining, slavery and conflict, and rising global pressure to improve transparency and reduce environmental impact.
In this regard, Fitch believes miners will increasingly invest in blockchain technology to improve supply-chain transparency and their environmental, social and governance profiles.
As a centralised, digitalised ledger that cannot be tampered with, blockchain presents a valuable opportunity for mining companies to effectively track the sourcing of
minerals across the supply chain to ensure they abide by ethical and sustainability standards, the report explains.
“Every action taken by an industry participant across the supply chain would be seen by other participants who have to approve and validate transactions that are uploaded onto the ledger, and these cannot be changed by any other participant once recorded – thereby enhancing transparency and accountability”.