Peak gold production
Many industry experts contend that 2015 will be the peak year for gold production. According to a report by World Gold Council (or WGC), gold mining output increased and set another record in 2014 to reach 3,114 tons. Going forward, however, WGC maintains that “growth in supply from such projects continues to diminish and is likely to cap out in 2015 as the supply pipeline thins.”
Goldcorp (GG) presented the above graph at the Bank of America Merrill Lynch Global Metals, Mining & Steel Conference in May 2015. The chart shows that gold production lags exploration by 20 years. Gold discoveries peaked in 1995. In 2015, 20 years later, production should also peak.
Declining production profile
Gold prices started declining in 2013. Since then, gold producers have been focusing on cost cutting and repairing balance sheets rather than developing mines. This is the major reason for declining production growth for many miners.
Kinross Gold (KGC) is one of the miners whose production profile is falling. The company lacks growth potential, and in order to maintain its production profile, it needs to either invest organically or acquire. Despite Kinross being an efficient gold operator, Kinross stock has been lagging, mainly due to a weak development pipeline and declining production. In the last two years, Kinross has cut its sustaining capex (capital expenditures) by ~50%, which is also a threat to future production.
Barrick Gold’s (ABX) production profile is going to be stable at best going forward. This is due mainly to non-core asset sales that it has already made or is in the process of making. In May, Barrick sold Cowal mine and its stake in the Porgera joint venture to decrease its debt. To find out more about this, you can read Market Realist’s series Barrick Gold Takes Key Steps towards Debt Reduction in 2015.
In the next part of this series, we’ll look at other miners that recorded depletion in their reserves in 2014. We’ll also see which two miners reported an increase in reserves.
Many intermediate and senior gold producers have declining production profiles. Mergers and acquisitions are thus expected to pick up in the coming months and quarters.
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