Global gold mine production probably peaked last year and could start sliding by 2004 unless bullion prices rally, prompting miners to pump money into new projects, analysts said on Tuesday.
Richard Davis, portfolio manager of the Natural Resources Team at Merrill Lynch Investment Managers, said exploration budgets plunged 40% in the late 1990s from their zenith in 1996 as gold prices languished near 20-year lows.
Bullion has since revived, supported by greater investment demand and unwinding of producer hedge-books, but not enough to bolster budgets, he said.
”At current levels, gold prices are too low to encourage sustainable, profitable investment in grass-roots exploration,” Davis told the Nikkei Gold Conference in Tokyo.
”Given the long lead-time between finding an ounce of gold and getting it out of the ground, the downward trend in gold production is unlikely to be reversed for some time.
”Obviously this scenario should be supportive of gold prices going forward.”
Spot gold was hovering around $311 an ounce on Tuesday afternoon in Tokyo, compared with just over $250 at its nadir in September 1999.
The global mining industry succeeded in raising production rates year after year even as gold prices fell in the late 1990s, but tighter profit margins inevitably ate into investment.
The resulting shortage of new projects in the pipeline could spur industry consolidation as gold companies seek to replenish existing reserves and production by purchasing their peers, Davis said.
”Alternatively, gold producers may extend their area of search into countries rich in mineral wealth but which have previously been regarded as too risky,” he said, citing Russia as an example of a country with plenty of cheap ounces in the ground.
Paul Walker, director of mine research group Gold Fields Mineral Services (GFMS), said global gold mine output could begin sliding within a little more than a year.
”Depleting reserves at mature operations in the United States, as well as Canada, and a marked decline in new production timetabled to come on stream in the short term should lead to a secular fall in global mine production beginning in 2004,” he said.
GFMS has forecast global mine production in 2002 will fall three percent year-on-year to 2 514 tons, the first decline since 1995. It expects output to slip two percent in the second half — an improvement from a first-half tumble of five percent.
It has projected a rise in 2003 before the expected dearth of new projects begins to bite.
Daniel McConvey, vice president of Global Investment Research at Goldman Sachs & Co, said output would likely taper off after several years.
”We estimate that mine supply should stay relatively constant for the next three years and then fall very slowly if gold prices remain at or below current $315 levels,” he said.
Beacon Group Advisors, a mining investment banking and research firm, said in April that world supply of mined gold could plummet by nearly 30% by 2010 unless bullion prices rally, encouraging miners to bring untapped deposits onstream. – Reuters