Eddie van der Walt London
THE BIGGEST gold bust in three decades is about to end a six-year expansion in mine output.
From Russia to South Africa to North America, the biggest producers saw profits turn to losses as prices plunged, forcing them to cut spending on mines in half over three years. While bullion output would probably reach a record this year, the increase would be the smallest in at least six years, before production dropped 1 percent in 2016, according to Barclays.
Mines supplied 3 114 tons last year, a record high valued at about $127 billion (R1.5 trillion), after companies stepped up investment to capitalise on prices that surged more than fivefold in the decade through 2011. While the appeal of gold as a financial asset means that supply does not usually influence the precious metal’s value as much as economic or monetary policies – partly because every ounce ever mined still exists – demand is growing in China and India, the largest buyers.
“Any contraction in mine supply will tend to tighten the physical market, which feeds through to price,” John Meyer, an analyst at London-based brokerage SP Angel Corporate Finance, said last week.
“It is also a positive influence in a larger dynamic that influences investor sentiment towards gold.”
With prices so low, about 10 percent of global production is not profitable, based on data from Metals Focus, a London- based industry consultant. The estimate includes the expense of mining and replacing reserves through exploration, as well as other costs. The firm, along with Morgan Stanley and Natixis, predict global gold output will decline.
“The big question is how fast supply will start falling,” Nic Brown, an analyst at Natixis, said in an interview from London last week. “We don’t think we are going to see sharp declines until at least 2017.”
Barrick Gold, the biggest producer, had a $2.9bn net loss last year, the biggest since 2009, on lower prices and write-downs on mines in Chile and Zambia. AngloGold Ashanti said in February that it would cut output by as much as 10 percent this year as it spent less and stopped mining high-cost deposits. The New York-traded shares of both companies have plunged by more than 70 percent since the end of 2011.
Capital spending, which covers maintenance and exploration, had fallen about 50 percent since 2012, according to data from Bloomberg Intelligence that tracked 11 of the largest gold producers. Ten of the world’s major producers posted a combined loss of $6.9bn last year, compared with combined profit of $11.3bn in 2010, the Bloomberg Intelligence analysis shows.
“Gold is money, but it is also a physical commodity, so if you reduce any element of supply, you will see price impact at the margin,” Bart Melek, an analyst at TD Securities, said from Toronto last week. “As monetary policy becomes less uncertain, supply-demand fundamentals will become a more important factor.”
Bank of America and Standard Chartered said in a March 30 report that the precious metal would probably advance this year, snapping two consecutive years of declines, as the US Federal Reserve raised interest rates at a gradual pace. Bullion would average $1 300 in the fourth quarter, Bank of America predicted. Standard Chartered sees an average of $1 320.
Money managers have become less confident in a gold rally as low inflation and a strong dollar erode the appeal of the precious metal as a hedge.
Speculators cut their net-long positions in US gold futures and options by 73 percent since the end of January, Commodity Futures Trading Commission data as of March 31 show. Investors sold more than 800 tons from gold-backed funds in the past two years, leaving holdings near the lowest since 2009, data show. – Bloomberg
Original Article: http://www.iol.co.za/business/news/mines-tighten-belts-as-gold-boom-ends-1.1841833#.VSUnUPnF9DQ
