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Decade of gold mine declines poised to spur deals, prices

16th November 2016

By: Bloomberg

  

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MELBOURNE – Gold’s dwindling pipeline of new mines is poised to usher in a decade-long output slump, spurring prices and delivering a new impetus for dealmaking and industry consolidation, according to Goldcorp, the third-largest gold producer.

Mine supply may fall about a third in the ten years to 2025, according to Bloomberg calculations based on forecasts from BMO Capital Markets and Randgold Resources . The number of newly discovered primary gold deposits fell to three in 2014, from a peak of 37 in 1987, according to Melbourne-based industry adviser MinEx Consulting Pty.

“What we’ll possibly see is consolidation in the industry as a result, whether that’s a large company taking over smaller ones, a number of smaller ones getting together, or even two or three large companies being merged,” Ian Telfer, chairperson of Vancouver-based Goldcorp, said in an interview. “No CEO wants to run a shrinking company.”

The number of deals in the gold sector this year is the highest since 2011 as the metal’s price surge has spurred producers to trade assets to add production or to improve the quality of their mine portfolios. Goldcorp is reviewing opportunities for acquisitions or partnerships including in new discoveries and existing assets, both in the Americas and further afield, Telfer said.

Billionaire Suleiman Kerimov’s family is considering selling a stake of as much as 25% in Russia’s largest gold miner Polyus PJSC, according to people familiar with the matter. Kirkland Lake Gold Inc. on Friday spurned an unsolicited takeover offer and urged shareholders to support an earlier agreement to buy Newmarket Gold in an all-stock deal valued at C$1.01-billion ($750-million).

Gold production may peak in the next three years as miners fail to replace their reserves, Randgold’s CEO Mark Bristow said in September. And, according to Goldcorp’s Telfer, producers have limited scope to raise output in response to higher prices. “We are having a heck of a time finding gold,” he said.

There’s also increasing competition to secure an interest in the best exploration finds by smaller competitors, according to Sandeep Biswas, CEO of Newcrest Mining, Australia’s biggest producer. Newcrest last month agreed to pay about $22.8-million for a stake in a developer with assets in Ecuador, beating a competing proposal from BHP Billiton .

Companies facing production declines have a three-to-four year window to expand their resource bases before buying becomes a necessity, BMO analysts including Andrew Kaip wrote in a September note.

Spot gold advanced 0.4% to $1 226.5/oz Tuesday at 9:46 a.m. in New York, according to Bloomberg generic pricing. The metal is up 16% this year, rebounding from three straight annual declines. Gold may average $1 500/oz by 2020, according to an August note from BMI Research.

“Once supply from mines starts to decline and people start to realize the impact that’s going to have, I think it’s going to be incredibly bullish for gold,” Telfer said in the interview last week in Melbourne. “If gold went to $2 500/oz tomorrow, Goldcorp’s production wouldn’t change for the next four years. It can’t react to a change.”

'RISKY BUSINESS'
A decline in gold mine output may arrive sooner than forecast, though a slowdown in supply will be gradual, Sydney-based Jordan Eliseo, chief economist at gold trader and refiner Australian Bullion, said by phone. “It’s not going to plummet overnight,” he said. The availability of recycled gold means the impact on prices may also be limited, Eliseo said.

In the medium term, output from existing mines will drop about 10% in the five years to 2020, according to London-based Metals Focus. While gold finds are brought into production more quickly than copper or nickel discoveries, it still takes an average of ten years to commercialise new projects, according to MinEx Consulting.

Newcrest expects to strike more deals as it looks to stock its growth pipeline, CEO Biswas told reporters in Melbourne last week. “There will be more,” he said. “Exploration is a very risky business, you have got to have a lot of irons in the fire.”

Edited by Bloomberg

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