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What Does the Plateauing Future Mine Supply Mean for Gold Prices?

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Gold miners’ efforts to reduce costs

Gold miners’ (GDX) efforts to reduce costs by cutting expenditure on general and administrative expenses, exploration, and development have paid off in the form of a reduction in all-in sustaining costs (or AISC). According to the World Gold Council (or WGC), the AISC fell from $1,113 per ounce in 1Q13 to $900 per ounce in 2Q15. Initially, cuts that were in miners’ control led to this decline. Lately, the reduction is due to factors beyond miners’ control, such as a reduction in commodity inputs and labor costs.

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Cuts in exploration and development

The cuts in exploration and development should constrain the gold mine supply in the medium to long term. According to WGC, total gold supply increased in 3Q15 by 1% year-over-year to 1,100 tons. A marginal dip in mine production during this period was offset by producer hedging. Mine production decreased by 1% to 827.8 in 3Q15. Going forward, the production at new mines is expected to plateau while, for more mature mines, it might start decelerating in the face of declining exploration and development budgets. Exploration and development are the first targets of cost-cutting, as they’re costly with no immediate benefit. Over time, however, this reduction will start to show itself in fewer gold ounces mined.

Declining reserves

Of the key producers, only Yamana Gold (AUY) and Agnico Eagle Mines (AEM) reported an increase in reserves in 2014 compared to 2013. The above graph shows the reserves for gold miners in 2013 and 2014. Even their reserves increased due to the acquisition of Osisko Mining’s Canadian Malartic mine in June 2014. All the other producers reported a decline in reserves. Centerra Gold, Kinross Gold (KGC), and Iamgold (IAG) each reported year-over-year declines of more than 15%.

Over the long term, a consistent reduction in exploration spending and declining reserves could lead to a reduced mine supply. While the mine supply forms a small percentage (~1.5%) of the overall available gold supply above ground, it’s an important source of incremental gold supply, as it’s the only real swing variable in overall total supply dynamics. Any impact of mine supply over the long term could, therefore, push gold prices higher.

Agnico Eagle Mines and Yamana Gold form 5.6% and 2.9%, respectively, of the VanEck Vectors Gold Miners ETF’s (GDX) holdings. The SPDR Gold Trust (GLD) and the iShares Gold Trust (IAU), on the other hand, provide exposure to physical gold prices.

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