TORONTO (miningweekly.com) – Although the world’s biggest gold producers managed to replace almost twice the reserves they lost due to production between 1999 and 2008, the rate at which the industry as a whole is discovering new deposits will not be sufficient to meet its needs over the long term, Canada’s Metals Economics Group (MEG) said on Tuesday.
The Halifax, Nova Scotia-based research company has published a study titled ‘Strategies for Gold Reserves Replacement’, in which it calculates that the average cost of replacing reserves – for companies that produced 450 000 oz of gold or more in 2008 – was $83/oz during the ten-year period, taking into account both acquisitions and exploration spending.
Simultaneously, this group also increased its aggregate production by a total of 10,7-million ounces a year of gold, and together accounted for about 55% of 2008 world gold production.
However, the group’s average annual cost of producing and replacing gold – incorporating operating costs, capital costs of new mines, sustaining capital costs at existing operations, and reserves replacement costs – more than doubled over the past decade.
“Although some increased costs were voluntary (mining lower-grade ores and accelerating capital investments for new mines in response to rising prices, for example) and there are signs that costs are beginning to decline, only a tripling of gold prices from the lows of the early 2000s to an average of $872/oz in 2008 has prevented a financial meltdown like that seen in the base-metals sector,” MEG said.
Companies searching for new gold resources are also encountering increased risks from political and regulatory instability in many developing nations.
“These countries tend to have inferior infrastructure, less political stability, and uncertain security of tenure – all leading to slower mine development at higher costs,” MEG said.
In the current industry-wide gold pipeline, 19% is in lower-risk jurisdictions, 57% in medium-risk areas, and 24% in high-risk jurisdictions, according to the study.
Globally, 62 significant discoveries, each containing at least two-million ounces in gold resources and reserves, have been reported so far in the period between 1997 and 2007 .
These discoveries contain a potential 377-million ounces of gold in anticipated recoverable reserves – less than one-half of the estimated world gold mine production during the same period.
“Even anticipating additional reserves from these and smaller discoveries, the industry’s new discovery rate still falls well short of what is needed over the long term.”
In fact, the major producers developed more than 90% of their exploration-derived reserves by upgrading resources at previously acquired projects and mines or at older discoveries, rather than from recent discoveries.
With gold majors getting bigger and bigger, they are under increasing pressure to add enough reserves to maintain a production rate that satisfies the long-term views of investors and analysts, MEG commented.
And this challenge is further exacerbated by the majors’ larger-size requirements for new projects. Based on 2008 production, the major producers need to replace an average of almost two-million ounces a year of reserves, ranging from a high of almost eight-million ounces annually for industry leader Barrick Gold, to about 500 000 oz for companies at the bottom of the list.
“Although, as a group, the major producers successfully replaced almost twice their total production over the past ten years, almost all of these reserves additions were achieved through acquisitions or by upgrading resources at existing projects and mines, and not through finding new significant discoveries,” MEG noted.
At Barrick’s annual shareholders’ meeting in April, new CEO Aaron Regent said that global gold production from mines will continue to decline, as the gold industry battles maturing mines, a scarcity of new discoveries and longer permitting and construction times for new projects
Global gold mine production contracted almost 3% last year, to its lowest level in 12 years, according to consultancy GFMS.