Gold mining’s new challenges: falling reserves, depressed prices, overvalued stocks, insufficient discoveries, rising costs – Small Caps

According to S&P Global Market Intelligence the gold industry is set to experience some great obstacles and opportunities.

Sixteen of the world’s 20 largest gold miners saw their levels of reserves drop between 2010 and 2019 — the most dramatic case being Toronto-based Kinross Gold beginning that period with enough reserves to last for 24 years but ending in 2019 with just nine years remaining.

This is just one of the challenges highlighted by New York-based S&P Global Market Intelligence in its latest gold industry review.

But there are others.

Conversely to the case of dwindling reserves among the majors, mine supply is expected to increase in the next few years — and that will (the report claims) depress prices.

All those smaller gold companies that have sprung into life and action of late will, within a few years, no doubt bring many new smaller and revived brownfield mines into production.

It gets worse (and more complicated).

The cashed-up gold exploration sector is now one where it is increasingly hard to find value.

Another problem is that there have been no what S&P Global would classify as major gold discoveries in the past three years — not a good look for an industry that needs to replace ageing major mines.

Yet another: all-in sustaining costs climbed in the second quarter of this year amid COVID-induced mine shutdowns.

Only two of 20 majors upped reserves over decade

Newmont (NYSE: NEM), Barrick (TSX: ABX), AngloGold Ashanti (ASX: AGG) and Kinross (NYSE: KGC) are among those major producers who are faced with declining reserves left to be mined.

S&P Global found that only China’s Zijin Mining and Mexico producer increased its reserves over the 2010-19 period, while South Africa’s Sibanye-Stillwater also grew reserves but it came into being only in 2013, while the other South African, Gold Fields (NYSE: GFI), saw its reserves remain unchanged at 20 years of supply.

Throughout the 10-year period, some majors relied mainly on acquisitions to replenish reserves although, as the report notes, “some of their largest deals are now viewed as overpriced, ill-timed or having not panned out”.

Over the period under study the top 20 producers paid an average US$175 (A$244) per ounce for replaced reserves.

The gold price peaked at US$2,070/oz in August and has since pulled back to hover around US$1,900/oz.

Increased mine supply could weigh on gold price

Getting a new head of steam after hitting US$2,000/oz recently might be a challenge according to S&P Global’s analysts.

Because supply is set to expand more quickly than in previous years.

Fitch Solutions is forecasting that global production will rise by more than a quarter by 2029 to 133 million ounces or 3,770 tonnes.

While Bank of America sees gold hitting US$3,000/oz by 2022, Fitch Solutions is putting its money on US$1,700/oz (and US$1,620/oz two years after that).

Are gold miners too pricey?

Joe Mazumdar of Exploration Insights, as quoted by S&P, claims too many of the 40 companies he met at a recent event were overvalued.

He also pointed out the implications of all the money that has been thrown at mining stocks by investors.

“Everybody’s got money, some more than they need — a lot more than they need,” Mr Mazumdar added.

Global juniors and intermediate gold companies raised US$1.48 billion in August – US$349.2 million more than in July. It was the fourth consecutive month of rising investment in gold companies.

A lot of ‘dumb money’

As of 14 September, US$6.21 billion has been raised by the sector, which is more than the whole of 2019.

The report quoted Peter Megaw, who is chief exploration officer of MAG Silver Corporation which is developing a high-grade silver mine in Mexico — and which raised US$50 million last month.

Mr Megaw said that while the cash is now flowing, it is not always discriminating.

“There’s a lot of dumb money pouring in, too, that is going to the same old stories.”

On the bright side, this flow of new investment means that gold explorers are not going to be wanting for money needed to find more gold.

Many more big discoveries needed

Discoveries — big ones especially — are sorely needed.

S&P’s Kevin Murphy said the company’s analysis of major gold companies has identified 278 deposits discovered between 1990 and 2019 that come within its “major discovery” definition.

But none were made in the past three years; and there were only 25 between 2010 and 2019.

Together, these contained “only” 154.3Moz, or just 7% of all gold discovered over the decade.

“The project pipeline is increasingly short of large, high-quality assets needed to replace ageing gold mines,” said Mr Murphy.

“The severe lack of new major discoveries over the past decade is a result of companies focusing on advanced-stage assets and known deposits, rather than searching for new discoveries,” he added.

There has been a marked move away from greenfield exploration to exploration at known deposits and around operating mines. Indeed, the share of budget exploration now devoted to greenfield exploration is half what it was in the 1990s.

AISC costs rising among majors

Thanks to COVID-19, costs among the larger gold miners rose 2.7% in the second quarter of 2020 to US$987/oz.

The biggest increase for all-in sustaining costs (AISC) occurred at Centerra Gold (TSE: CG) and its Turkish mine, up 12.9% in the quarter, with second and third place getters being Evolution Mining (ASX: EVN) up 9.7% and Yamana Gold (TSE: YRI), up 9.0%.

Costs at Newcrest Mining (ASX: NCM) rose 7.5%.

Among the small number of major companies actually lowering costs were Kirkland Lake Gold (ASX: KLA) which shaved 3.2% off its AISC figure and Northern Star Resources (ASX: NST) which sliced a hefty 7.3% off its outgoings.

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