It’s no surprise gold production in South Africa has been falling significantly over the past few decades. In fact, the market barely reacted to recent news that China has overtaken South Africa as the world’s top gold producer.
“I don’t think it will necessarily have a very great effect in terms of the supply/demand balance,” Philip Klapwijk, executive chairman of precious metals consultancy GFMS Ltd., said of China’s big move. “It’s more a signalling effect, and that tells us that what has been the world’s greatest source of gold, South Africa, appears to have lost its crown in 2007 as the largest producer of the mined metal. That’s the first time South Africa hasn’t been No. 1 for well over 100 years.
“So this is really quite an important milestone for the historical record and will probably be interpreted as yet another sign of the malaise of gold mine production in spite of these record price levels that we’re enjoying.”
South African gold production has fallen more than two-thirds since its peak output of more than 1,000 tonnes in 1970. Last year, production totalled less than 300 tonnes, and it is continuing to fall. In 2006, gold output fell to its lowest level since 1922, and Statistics SA reported that output declined 12.7% in November 2007 compared to November 2006. In addition, production has fallen by more than half in the last 10 years alone.
But with growth in output from China and similar regions, global mine supply is actually expected to remain relatively flat compared to the past five years, according to the VM Group’s “The Yellow Book”. In 2008, the commodities consultancy expects mine production to total 2,414 tonnes, compared to an estimated 2,413 tonnes in 2007. Output was 2,367 tonnes in 2006, 2,411 tonnes in 2005, 2,351 tonnes in 2004 and 2,512 tonnes in 2003.
“There are other areas emerging as what we call ‘new world mine supplies,’ so you’ve got Russia, China, those kinds of countries beginning to come into their own,” VM’s chief executive Jessica Cross said.
“We see the geographical emphasis of mine supply shifting. The South African stuff is really to be expected. It’s a very, very mature industry with deep, hard rock. It’s getting more and more expensive to go down, and the grades have been gradually reducing because they’ve already mined the good stuff out. So for the South African industry, the challenge is really going to be reserve replacement, either within South Africa or externally. The options in the South African industry are not what they used to be.”
According to Cross, South African producers likely won’t even be able to use increasingly high gold prices to their advantage.
“Even with these high prices, we’re not going to see this surge in supply that a lot of people would have expected,” she said. “It’s not a case of just being able to say, ‘Well the gold price is high, so let’s turn on the tap and get more out of the ground.’ I think the major companies have been having problems finding greenfields projects with the geologists out there doing their exploration.
“I think it’s getting increasingly more difficult to find very large world class deposits, and this is really one of the big challenges to the industry - how do the major companies continue to replace reserves that are depleting on an annual basis?”
Cross said that producers have two choices: They can either continue to explore for new ore bodies or consolidate by buying juniors that are already performing exploration activities. But the options are limited, she said.
The high price of gold may eventually spark an increase in production globally, but even that is questionable, according to Martin Murenbeeld, chief economist of the Dundee Group of Companies.
“The mines are still suffering, actually, from the period of time in the late 1990s when the gold price was so depressed,” he said. “It takes an upwards of 10 years for companies to find gold and then get it out of the ground and get it into the market. We’re seven years past the bottom of the gold price, so certainly for the next three or four years we’re going to see mine supply be relatively weak.
“Now over time with the higher gold price, you’d expect to see more gold output. So let’s say in the second half of the next decade, 2015 onwards, you’d expect to see more mine supply, but at this point that’s a guesstimate.”
Murenbeeld said it doesn’t matter if the gold comes from South Africa or anywhere else - if the total supply worldwide does not rise, it is bullish for the gold price. “We have some formulas, a sort of simple rule of thumb that we use, that a 10% decline in gold production will tend to raise the price of gold by about 5%,” he said.
But other factors - including the U.S. dollar and the price of oil - will be much more influential on the gold price than mine supply, Murenbeeld said.
“Those are the things that I think are key to the medium-term and longer-term outlook for gold. At some point, presumably, you will get some more good production. If the gold price averages $1,000, presumably some mines that weren’t producing back at $500, or heaven forbid $250, they may be producing at $1,000. So there will be some impact from mine supply, but I don’t think that’s an issue for the next couple years.”
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