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Opinion   Independent Reports   Gold sector (T.ABX) cost-cutting could spark...

Gold sector (T.ABX) cost-cutting could spark supply squeeze

Sean Brodrick , Investment U
1 Comment| October 1, 2013
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Are gold traders being played by the Fed? Almost certainly.

Consider what happened last week. First, gold prices rallied hard when Chairman Ben Bernanke announced that there would be no “tapering” of the Fed’s quantitative easing program. Then, two days later, a Fed governor said that tapering was likely in October. This sent gold prices caroming back and forth, and left traders shell-shocked.

But you don’t have to be a victim of these short-term distractions. Oxford Club Members know that sound investment principles and long-term thinking should guide their decisions.

And longer term, it sure looks like there is going to be a supply squeeze in gold.

Why?

Because producers, big and small, are making hard decisions in terms of costs, projects and operations.

For example…

  • Barrick GoldCorp. (ABX: T.ABX, Stock Forum) (NYSE: ABX,Stock Forum) the world’s largest producer, said it may sell, close or curb output at 12 of its 27 mines from Peru to Papua New Guinea. Barrick’s Pascua Lama project took a write-down of more than $5.5 billion and production will be delayed until at least mid-2016. Pascua Lama alone would account for 800,000 or more ounces of gold every year.

  • Barrick is closing its exploration office in Australia, and is selling three of its mines there. Producers Coyote and Laverton are each closing a mine in Australia because they are not profitable at current prices. Together, they account for 125,000 ounces of gold per year.

  • Barrick also plans to mothball its Ruby Hill mine, and its 60,000 to 80,000 ounces a year, in Nevada.

  • Kinross Gold Corp. (TSX: T.K, Stock Forum) (NYSE: KGC, Stock Forum) abandoned its $1.3 billion Fruta del Norte project in Ecuador. That project was originally scheduled to go online next year, and produce an average 410,000 ounces annually.
  • Kinross has also decided not to expand its Tasiast gold mine in Mauritania due to political and labor troubles. That mine produces 200,000 ounces a year. It would have produced 830,000 ounces a year if expansion plans went through.
This is just a sample. There are mine closures and cutbacks going on all over the world.

Meanwhile, ore grades at gold mines are dropping fast. Mineweb reports that grades in the South African gold sector fell from an average of 4.3 grams per metric ton in 2002 to an average of 2.8 grams per metric ton in 2011.

To put that another way, a South African miner has to move, on average, a metric ton of rock to get 2.8 grams (0.09 troy ounces) of gold. No wonder South African mining companies are in deep financial fertilizer!

I made the following tables comparing gold ore grades in 2011 (the most recent data available) and 1998…

Click to enlarge

Click to enlarge

Two things are obvious from these tables.

First, grades of gold ore at mines have fallen significantly. Second, gold deposits, even the rich ones, get used up.

Therefore, miners have to explore constantly for replacement deposits.

But in the face of weak gold prices, gold miners are not expanding exploration. Quite the opposite. In fact, miners are taking a hatchet to exploration budgets. For example, Barrick has cut its North American exploration budget in half this year.

So, we have mines shutting down production all over the world, and ore grades falling at those mines staying open. How do you think that story ends?

I think it ends with a lot less supply.

International Demand

Meanwhile, demand for gold in countries such as China just keeps getting stronger. What’s more, across Asia, we are seeing economies kick into higher gear. These are countries that have a cultural affinity for gold.

You don’t need a crystal ball to see that supply/demand is going to be squeezed, and probably soon. That tells me that the next big bull market in select gold mining stocks – the good ones – is closer than many people think.

I’m focusing on miners that have the ability to execute well both on the ground and in the market. I think they have the potential to become earnings machines as the price of gold rebounds.

Better yet, you can buy these titans of tomorrow right now for pennies on the dollar. So what are you waiting for? If you’re waiting for the bottom in gold, you’ll only see that in the rearview mirror.

Tags:
GOLD
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