Fear Grows Over Future Supply of Gold

For the first time in history, gold supply into the future is under enormous pressure. That warning from Mark Bristow, the CE of London and Johannesburg-listed Randgold, encapsulates the gold mining sector’s woes.

Bullion’s only modest price recovery this year compared with other commodities has led the industry to cut spending dramatically on exploration to less than $4 billion from almost $10 billion in 2012, BusinessLive reported.

Petropavlovsk, a gold miner with assets in Russia, is a case in point. It has cut its exploration budget by two-thirds. “There is a chronic shortage of exploration money and as usual the gold price is not acting in the way everyone though it would do,” says Peter Hambro, chairman of the company.

This backdrop has left many in the industry forecasting a supply shortage by the end of the decade.

Bristow believes this supply shortage will be inevitable unless some major discoveries of large, high-grade ore bodies are suddenly made. “Which frankly seems a remote possibility.”

Across the world, miners have instead spent their cash expanding existing deposits, improving efficiency or cautiously looking at acquisitions.

Canada’s Barrick Gold, which also does not expect to increase its total production of gold over the next four years, is in the process of selling its noncore assets. China’s Minjar Gold, a subsidiary of property company Shandong Tyan Home, is currently bidding for its Super Pit gold mine in Kalgoorlie, the largest gold mine in Australia.

A focus on free-cash flow generation and dividends is also in evidence. In August Newcrest Mining, the largest Australian gold miner, announced its first dividend payment for more than three years. The new approach is largely being backed. “They’ve got a little bit more breathing room this year but not much and the market is very discriminating about giving capital to these companies until they can demonstrate returns on investment relative to the risk,” says Joe Wickwire, portfolio manager at the Fidelity Select Gold Portfolio.

With fresh debt in short supply, capital spending by the 16 gold miners tracked by Moody’s Investors Service has fallen to less than half its $25 billion peak in 2012. The rating agency expects gold miners to start spending “in a measured way” this year.

“Spending will probably focus on extending existing operations and phased development, rather than large-scale greenfield projects,” Moody’s adds.

Big new discoveries could rely on opening up new territories. One such place could be Iran, where little exploratory drilling has taken place due to the lack of international and domestic funding, according to Mark Mounde of Wardell Armstrong, who has travelled to the country with geologists.