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Do Gold Miners Need to Look to Emerging Markets for Growth?

Zacks Equity Research

The gold mining industry is facing serious supply problems. The CEO of Randgold Resources GOLD, Mark Bristow said yesterday that the biggest risk facing the gold miners is their reluctance to seek big new discoveries in emerging markets, according to a Reuters report. Many of these top producers are instead clinging to so called safe jurisdictions, Bristow added.

Bristow further noted that the industry has been mining gold at a faster rate than it finds new reserves since 2000 and must speed up exploration and development in emerging markets to address the supply crisis. He called on "big" gold miners to look beyond the depleted and mature mining destinations of the past and make long-term investments in emerging markets.

Bristow said that the industry has discovered around 10 million ounces of gold annually over the past five years while producing 90 million ounces. Miners must increase their investment in emerging regions to change this equation.

Gold supply continued to trickle down in fourth-quarter 2016, per a report by the GFMS team at Thomson Reuters. This made 2016 the first calendar year of a fall in mine output since 2008. Global gold mine output is expected to decline more than 7% between 2015 and 2019.

Randgold, which has operations in the Democratic Republic of Congo, Mali and the Ivory Coast, saw higher production for the sixth straight year in 2016, achieving a record gold production of around 1.25 million ounces for the year. The company also cut its production costs in 2016 as its total cash cost per ounce fell 6% year over year.

Depletion of the conventional mining jurisdictions has forced several gold miners to turn to emerging regions having significant potential. Apart from Randgold, Eldorado Gold EGO is another gold miner that is operating successfully in non-mainstream, emerging jurisdictions and is investing in under-explored, highly-prospective regions. It has operations in Turkey, Romania, Greece and Brazil.  

Lack of New Projects Hurting Production

While demand remains healthy, supply of gold has already attained peak levels as per reports. Lower gold prices in the past few years had restricted the ability of gold producers to invest in new projects. There are few new projects and expansions are expected to start producing this year. Further, those in the near-term pipeline are generally fairly modest in scale. Thus, global mine supply is set to continue its downward journey in 2017.

Total mined gold production was flat year over year at 3,236 tons in 2016. While output is slowing down from older mines, particularly in South Africa and the U.S., the incremental impact on production from new mines coming on stream is gradually on the ebb.

Earlier, incremental production from newer mines led to continued growth in overall gold production. However, newer mines are now at or near their full potential, leading to slowing down in the growth rates. This has made further production gains increasingly difficult. Reduced spending on exploration and development has already taken its toll on the production pipeline and will further squeeze production moving ahead.

Some gold companies including Barrick Gold ABX, Goldcorp GG and Newmont NEM are currently high-grading at certain mines. The high-grade portion of a mine is mined first as this increases the grade of the mined ore and lowers cost per unit. But it has its downsides as it depletes reserves quickly, thus affecting long-term supply.

Prospects of Rate Hike Weighing on Gold

Gold enjoyed a solid run during the first half of 2016 with prices surging as much 25%, spurred by Brexit-induced market volatility, the U.S. Federal Reserve’s dovish stance and concerns over the global economy. However, the yellow metal lost its momentum toward the year-end with prices retreating in the last two months of 2016 following President Trump’s election win and the Fed’s interest rate hike. Gold’s decline was also triggered by a surge in the U.S. dollar.

Nevertheless, Gold regained some lost ground earlier this year with prices breaking above the $1,200 an ounce threshold. The prices of the metal are up around 4.4% this year.

However, the prospects of a more-hawkish stance from the Fed remain a major source of headwind for gold. Expectations of a rate hike this month has put downward pressure on gold prices of late. Gold prices slumped to a five-week low yesterday as better-than-expected private-sector hiring numbers further boosted prospects for a Fed rate hike and provided a lift to the greenback.

All eyes are now fixed on Friday’s non-farm payrolls data for February, viewed as a key barometer of the U.S. economy and also the last major economic data ahead of the forthcoming Fed meeting. A strong report would further strengthen expectations of a rate hike, which in turn will lift the dollar and hurt gold.

The Zacks categorized ‘Mining-Gold’ industry has also underperformed the broader market over the past year. The industry has gained a paltry 1.8% over this period, much lower than S&P 500’s corresponding return of 18.4%.


In Conclusion

Gold miners, grappling with low gold prices, have cut down on expenditure and are hesitant to invest in new projects. Instead, they remain focused on maximizing production from their existing portfolio of assets. However, given the lack of new projects, mine production will eventually hit a plateau in the next few years. Amid this scenario, it is essential for the big players in the space to step out of their comfort zone and invest in highly prospective emerging regions to boost their production as well as growth profile.

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