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Gold Keeps Climbing – Mining Beacon

Mining Beacon April 17 2019

Recent research reports from S&P Global Market Intelligence highlight record gold production in 2018, and outline some of the reasons for the increased appetite for gold mergers and acquisitions.

Global gold production increased in 2018 for the 10th consecutive year to reach a total of 107.3 Moz, according to a recent report from S&P Global Market Intelligence (SPGMI). As signaled in the recent HindeSight bog, although the year-over-year increase of just under 1% was the smallest in the past decade, output of the precious metal has now risen 40% since 2008.

SPGMI forecasts further growth, of 2.3 Moz, this year. If so, it will be the strongest growth of the past three years. As the report’s author, Chris Galbraith, wrote; it will debunk the commentary of “peak gold”.

Looking at the current project pipeline, and without large-scale moves in the gold price or any speculative estimates on additions through exploration activity, SPGMI expects gold output to stay steady until 2022 and decline thereafter. Indeed, more than 15% of gold production by 2024 will be coming from mines that are not yet producing.

More than half of this year’s increase is projected to come from mines that are expected to come on stream in 2019. Examples of those include the Gruyere JV in Western Australia (Gold Fields Ltd and Gold Road Resources Ltd), Meliadine in Nunavut (Agnico Eagle Mines Ltd), Sigma-Lamaque in Quebec (Eldorado Gold Corp.), and the restarted operations at Obuasi in Ghana (AngloGold Ashanti Ltd) and Aurizona in Brazil (Equinox Gold Corp.), both of which have been idle since 2015.

SPGMI notes that the ramp-up at PJSC Polyus’s Natalka operation and commissioning at Nord Gold SE’s Gross mine are significant contributors to a continued increase in Russia’s gold production. The country’s production is expected to equal Australia’s gold output in 2020, and then surpass it. In Canada, the startup of Meliadine and continued ramp-up of Rainy River, Eleonore and Hope Bay, among others, will drive amongst the fastest national growth over the next few years. This year, Canada is projected to pass the US in national gold production to become the fourth-largest gold producing country.

Although SPGMI expects global production to start declining after 2022, not all jurisdictions will have shrinking production. Of the 99 gold-producing countries monitored, 49 are expected to produce less in 2024 compared with 2018, 27 to produce more and 23 are expected to maintain production.

Australia’s production is expected to fall the most. The current second-largest gold producing nation, behind China, is expected to fall to fourth place globally by 2024. The underlying reason for Australia’s fall is the depletion of several long-lived assets, such as St Ives, Paddington, Telfer, Edna May, Southern Cross and Agnew/Lawlers. The expected commissioning of Mt Todd and reactivation of Union Reefs Operations Centre will only partly mitigate the loss from existing operations.

Although Indonesia’s gold production will be substantially lower in 2024 than it was last year, the country’s production in 2018 was anomalously high primarily due to the unusually large output at Grasberg. Peru’s production, however, is clearly trending downward, with Orcopampa, La Zanja and Tambomayo all facing depletion before 2024. With closure only a few years further out, SPGMI notes that Lagunas Norte and Yanacocha will also be producing far less gold in 2024 than they have historically.

Grades are Key

From 2014 through 2018, ore throughput at primary gold mines rose 1.2% but the weighted-average gold grade increased 4.5%. As a result, gold production from primary gold mines increased by 6% during the period.

The increase in grade is projected to continue through 2020 but in 2021 SPGMI expects ore throughput to remain steady and grade to fall by 2% year over year. These two factors are expected to account for around 1.6 Moz in reduced production. By 2024, around 241 Mt less ore is expected to be fed through gold mills compared with 2019, while the gold grade will be almost 2% higher overall. Owing to that drop in throughput, the related drop in production from primary gold mines will be almost 9 Moz.

SPGMI estimates that 11% of global gold production came from polymetallic base metal mines in 2018. Gold production from those mines will fall this year and in 2020 but the share from polymetallic mines is expected to increase gradually thereafter. With falling production from primary gold mines after 2020, and minor increases from polymetallic mines, a growing share of the world’s gold production will come from sources where gold is a byproduct. Less than 10% of the world’s production is expected to come from secondary sources in 2020, but this amount is expected to grow to more than 11% again by 2024.

Reason for Gold M&A

In a separate SPGMI article on April 3, Richard Foy commented that the market capitalisation of gold-mining companies has halved since 2012. This devaluation, and a recent push for consolidation, has increased M&A activity, with majors capitalising on the reduction in enterprise value (EV) in 2018.

Recent M&A deals have reflected this theme as companies look to unlock synergistic cost savings. This has seen gold production remain relatively constant among the top 30 listed gold-mining equities between 2014 and 2018, at about 43 Moz/y, with a 3% increase expected in 2019. The consensus earnings margin outlook of 30% for gold-mining equities is supported by SPGMI’s view on 2019 all-in sustaining cost margins at 33%.

In 2019, the ratio of the EV to EBITDA of the 30 largest gold miners is expected to go below 7.0 for the first time in six years, according to SPGMI. This is the result of a modest decline in EV (due to declining net debt offsetting a rise in market capitalisation) along with an expected increase in earnings. This drop in the ratio could explain the heightened M&A activity among the gold majors.

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