JOHANNESBURG (miningweekly.com) – The gold mining industry is not spending enough to sustain the industry into the future.
Slowed primary gold supply growth is making a case for the belief that the industry may be close to hitting a peak in production amid slower exploration spend and a virtual halt to new projects.
The average reserve life of 11 gold mining companies studied has fallen from 24 years to 17 years.
High-grading is also taking its toll; the average head grade of the 11 gold mining companies studied has been higher than the reserve grade for the past three years.
The high-grading has not stopped with the rise in the gold price evidenced by the gap between reserve grade and high grade widening.
In 2015 alone, 52% of production was mined at grades above the reserve grade, a research agency report has shown.
To have 52% mined at grades above the reserve grade indicates a deliberate bypassing of lower grade gold ore.
If and when the lower grade is mined, costs will be pushed up as occurred in the early 2000s.
Gold Fields CEO Nick Holland raised these and many other disturbing points in his address to the 2016 conference of the Australasian Institute of Mining and Metallurgy, in Brisbane, on Monday.
He spoke on the performance of the major gold mining firms over the past five years and asked whether the industry can avoid "the sins of the past" now that the gold price is stronger again.
While the gold mining companies he studied managed to improve margins, generate more cash flow, reduce debt and strengthen balance sheets in the last few years of a low gold price, the benefit to shareholders has not been marked and the risk of the ratios reversing if the gold price suddenly falls back down to $1 100/oz remains.
On a production per share basis, the gold companies studied have actually gone backwards, which is indicative of shares being possibly issued to repair balance sheets or to retire underwater hedge positions rather than to change fundamental trajectories.
The sale of gold exchange trade funds, coins and bars is up and central banks are buying gold.
“All this tells us gold is becoming scarce because if primary supply is coming off, scrap is very price sensitive and central banks are buying, gold is going to be quite difficult to find particularly if you haven’t been exploring for the last 20 years,” Holland said.
Critically, the industry needs to embrace innovation and technology to cope with grades likely to be lower than those mined currently.
Technology is also needed to cope with the increasing complexity of orebodies, which are becoming more refractory in nature and no longer lending themselves to conventional cyanidation.
“We’re going to have to work closely together as an industry,” Holland reiterated.
Judicious exploration in the right areas is needed and marginal production must be resisted.
“Investors want us to show margin expansion with the current gold price rise. They want to see growth in free cash flow on a per ounce basis, and they would like to have some optionality for higher gold prices,” said Holland, who four years ago – in 2012 – addressed the Melbourne Mining Club on the need to change.
“It wasn’t a popular message at the time but with hindsight it proved prescient,” he recalled.