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London - Output from the world's gold mines is set to hit record highs this year, disappointing bulls who are impatiently waiting for production cuts following this year's 24% plunge in prices.
Some gold miners have felt the squeeze of lower prices this year, and a number, including Canada's Kinross and Russia's Polymetal, suspended marginal mines and projects after a dramatic first-half price drop.
But as prices fall, others are actually increasing output to maintain revenue and profit levels. In some cases, they are targeting higher grade ore to keep marginal mines operating and generating cash, at the expense of future production.
Furthermore, several large projects put into motion during gold's 12-year rally, which took it as high as $1 920 an ounce in 2011, are coming to fruition.
"Our expectation is that we're going to see a fresh record high in gold mining output this year," GFMS analyst William Tankard said.
"What we're seeing is an ongoing response not to the slide in prices, but the decade-long stretch of fairly heavy capital investment into the mining industry that preceded it."
The world's top three gold miners - Barrick Gold, Newmont Mining and AngloGold Ashanti [JSE:ANG] - all reported higher production in the most recent quarter.
For some marginal mines, firms are planning to tap better grades up front, a practice known as high-grading, which often comes at the expense of shortening the life of a project and giving up lower grade ore that could have been economic later.
African Barrick Gold, for example, re-engineered its lowest grade and highest cost mine, Buzwagi, to tap higher grades and move less material, hoping to ensure the operation generates cash.
"In the short term, when they have got flexibility, you can see companies changing the ore mix to keep themselves operating," Nomura analyst Tyler Broda said.
"It costs money to shut things down."
Costs edge down
During the boom years, the cost of gold mining soared. But this year the average cost of producing an ounce of gold is already showing signs of retreating, according to metals consultancy Thomson Reuters GFMS.
All-in costs are expected to ease back to around $1,200 an ounce in 2013 from $1 228 last year, after total cash costs fell to $769 an ounce in the second quarter from $796 in the first three months of the year.
That is still perilously close to the spot gold price of $1 270, and there is only so far miners can cut back to keep tough operations afloat. But, analysts say, the long delays and time scales in mining mean it will take time for the drop in prices to translate into lower mine output.
For now, miners are cranking up volumes to boost revenue and spread out their hefty fixed costs over a bigger base - just as large new projects such as Randgold's Kibali mine in the Democratic Republic of Congo and Barrick Gold's Pueblo Viejo in the Dominican Republic come onstream.
Metals consultancy Metals Focus says it expects gold mine output to break through 3 000 tonnes a year in 2014 for the first time. That compares with an estimated 2013 output of 2 920 tonnes and 2012's 2 861 tonnes, according to GFMS.
Gold production could start moderating in 2015.
"That's the point when you will start to see some cost-cutting closures," Metals Focus analyst Oliver Heathman said. "Depending on the mines, they can sustain a period of high grading. The bulk of mines are still profitable on a cash cost basis at $1 000 an ounce, but not on a prolonged basis."
Perception
The impact that increases and decreases of a few hundred tonnes will have on gold prices is unclear, however.
Gold's large above-ground stocks and heavy recycling mean primary supply has less impact on prices than on those of other commodities such as platinum or copper.
"Could we see another 500 tonnes coming out of mining before it starts to act as a meaningful floor to the price? I would say that we could," GFMS's Tankard said. "We saw production at around 2 400 tonnes a year as recently as 2008. It's certainly feasible to get back to those levels."
So far, a sizeable drop in the other main section of supply, recycling - down 158.1 tonnes in the first nine months of this year - has done little to support prices. That drop has been heavily outweighed by expectations that demand will stay weak.
The World Gold Council said earlier this month that gold consumption this year could fall by 5% to 10%, potentially taking it to a four-year low, as investors liquidate bullion holdings and the pace of central bank buying slows.
For gold, which is primarily valued as an investment vehicle, the importance of output for price is as much about perception as reality.
If demand starts to recover, investors could be tempted back to gold if they think falling mine supply can play a part in supporting prices.
"If you produce 10% less gold next year, it won't make a lot of difference," Mitsui Precious Metals analyst David Jollie said. "But the message it sends to investors is that the price cannot sustainably stay at low levels over an extended period of time."
"We all know how that game pans out."
Some gold miners have felt the squeeze of lower prices this year, and a number, including Canada's Kinross and Russia's Polymetal, suspended marginal mines and projects after a dramatic first-half price drop.
But as prices fall, others are actually increasing output to maintain revenue and profit levels. In some cases, they are targeting higher grade ore to keep marginal mines operating and generating cash, at the expense of future production.
Furthermore, several large projects put into motion during gold's 12-year rally, which took it as high as $1 920 an ounce in 2011, are coming to fruition.
"Our expectation is that we're going to see a fresh record high in gold mining output this year," GFMS analyst William Tankard said.
"What we're seeing is an ongoing response not to the slide in prices, but the decade-long stretch of fairly heavy capital investment into the mining industry that preceded it."
The world's top three gold miners - Barrick Gold, Newmont Mining and AngloGold Ashanti [JSE:ANG] - all reported higher production in the most recent quarter.
For some marginal mines, firms are planning to tap better grades up front, a practice known as high-grading, which often comes at the expense of shortening the life of a project and giving up lower grade ore that could have been economic later.
African Barrick Gold, for example, re-engineered its lowest grade and highest cost mine, Buzwagi, to tap higher grades and move less material, hoping to ensure the operation generates cash.
"In the short term, when they have got flexibility, you can see companies changing the ore mix to keep themselves operating," Nomura analyst Tyler Broda said.
"It costs money to shut things down."
Costs edge down
During the boom years, the cost of gold mining soared. But this year the average cost of producing an ounce of gold is already showing signs of retreating, according to metals consultancy Thomson Reuters GFMS.
All-in costs are expected to ease back to around $1,200 an ounce in 2013 from $1 228 last year, after total cash costs fell to $769 an ounce in the second quarter from $796 in the first three months of the year.
That is still perilously close to the spot gold price of $1 270, and there is only so far miners can cut back to keep tough operations afloat. But, analysts say, the long delays and time scales in mining mean it will take time for the drop in prices to translate into lower mine output.
For now, miners are cranking up volumes to boost revenue and spread out their hefty fixed costs over a bigger base - just as large new projects such as Randgold's Kibali mine in the Democratic Republic of Congo and Barrick Gold's Pueblo Viejo in the Dominican Republic come onstream.
Metals consultancy Metals Focus says it expects gold mine output to break through 3 000 tonnes a year in 2014 for the first time. That compares with an estimated 2013 output of 2 920 tonnes and 2012's 2 861 tonnes, according to GFMS.
Gold production could start moderating in 2015.
"That's the point when you will start to see some cost-cutting closures," Metals Focus analyst Oliver Heathman said. "Depending on the mines, they can sustain a period of high grading. The bulk of mines are still profitable on a cash cost basis at $1 000 an ounce, but not on a prolonged basis."
Perception
The impact that increases and decreases of a few hundred tonnes will have on gold prices is unclear, however.
Gold's large above-ground stocks and heavy recycling mean primary supply has less impact on prices than on those of other commodities such as platinum or copper.
"Could we see another 500 tonnes coming out of mining before it starts to act as a meaningful floor to the price? I would say that we could," GFMS's Tankard said. "We saw production at around 2 400 tonnes a year as recently as 2008. It's certainly feasible to get back to those levels."
So far, a sizeable drop in the other main section of supply, recycling - down 158.1 tonnes in the first nine months of this year - has done little to support prices. That drop has been heavily outweighed by expectations that demand will stay weak.
The World Gold Council said earlier this month that gold consumption this year could fall by 5% to 10%, potentially taking it to a four-year low, as investors liquidate bullion holdings and the pace of central bank buying slows.
For gold, which is primarily valued as an investment vehicle, the importance of output for price is as much about perception as reality.
If demand starts to recover, investors could be tempted back to gold if they think falling mine supply can play a part in supporting prices.
"If you produce 10% less gold next year, it won't make a lot of difference," Mitsui Precious Metals analyst David Jollie said. "But the message it sends to investors is that the price cannot sustainably stay at low levels over an extended period of time."
"We all know how that game pans out."
