Even though the resurgent gold price has garnered a renewed sense of optimism in the gold industry, a lack of exploration spend from miners means it is facing a potential period of secular decline over the long-term, according to Wood Mackenzie’s gold team.
Exploration budgets were slashed following the fall in the gold price from the highs that were reached in 2011/2012 and they have since failed to recover, according to Wood Mackenzie.
“The slight rebound in exploration spend we have seen over the past couple of years has largely been focused on brownfield projects and near-mine development,” the analysts said. “This has not been sufficient to replenish mined ounces and, as such, peak gold supply is now a very real possibility.”
Over the past couple of months, with gold breaking through $1,500/oz, it seems that exploration activity may be turning a bit of a corner.
The analysts provided evidence:
- In late June, Agnico Eagle Mines started an exploration drilling program at its Amaruq site in an effort to convert underground indicated resources;
- On September 4, Polyus announced the completion of an exploration drill program at its Sukhoi Log project (pictured) that totalled 203,647 m and is planning 30,000 m of infill drilling in 2020; and
- On September 10, Newcrest reported that its exploration program on the Havieron project, located 45 km east of Telfer in Australia, has four operating drill rigs, which have cut 6,166 m and a fifth drill will begin in September.
It will be some time, however, before this activity translates into reserves and ultimately into production.
Proposed exploration budgets for the largest producers in 2019 remain fairly conservative compared with the levels reached in 2012, according to the analysts. It would therefore seem unlikely that the trend in declining reserves will be abated this year.
Producers have been very vocal in reaffirming their strategy of cost control, portfolio management and capital discipline, particularly since the run up in the gold price, ensuring they do not get criticised for the same type of costly M&A and marginal project spend they carried out in the previous gold price highs.
“How steadfast miners will be to this strategy into 2020 and beyond, if prices continue to remain well supported, remains to be seen,” the analysts said.
Due to insufficient exploration spend, gold reserves have depleted significantly with the global average mine life falling from 16 years in 2012, to an estimated 11 years in 2018, they said. However, the largest producers are not facing quite such an acute situation, with their collective average mine life still over 16 years. “It is perhaps therefore not so surprising that they can afford a more calculated approach to replenishing reserves.”
To secure their longevity as pillars of the gold industry, Wood Mackenzie said it has seen heightened M&A activity and miners focusing on their core assets. While this may help to bolster balance sheets through improved operational performance and realised ‘synergies’, it seemingly does little to address the problem the industry is facing with regards to how to sustain current production levels.
“We have, as of late, noticed an uptick in some majors opting to increase their footholds in a select few juniors with promising exploration opportunities,” the analysts said.
Agnico Eagle, AngloGold Ashanti, Kinross and Newcrest are actively investing in, or entering into joint-ventures with junior gold companies to create long-term value.
Agnico Eagle announced a proposal on June 24, 2019 for an all-share acquisition of Alexandria Minerals Corporation at a $0.05 per share premium to the Chantrell Ventures Corp offer; however, O3 Mining acquired Alexandria on August 1, 2019.
AngloGold Ashanti upped its stake in Pure Gold Mining to 14.3% on July 16, 2019, which owns the Madsen gold project in Red Lake, Ontario.
Kinross purchased the near-surface, early-stage Chulbatkan project in Russia from N-Mining Limited for a total consideration of $283 million on July 31, 2019.
The analysts said: “We expect to see this trend of increased M&A activity to continue, particularly amongst the more mid-tier gold producers as they look to solidify their own positions in the industry. This will likely encompass mergers with peers to unlock shareholder value and the acquisition of assets that majors have determined to be non-core.
“This may help to progress some later stage projects into production that have been sitting on the shelf for a number of years, but we are not anticipating a knee jerk reaction to current prices. Smaller projects which have a short payback period, in a low sovereign risk jurisdiction, are an attractive proposition and we could see a number of these projects being fast tracked into production.”
And, going forward, to address the predicament of declining reserves, if prices remain elevated miners may be inclined to review their reserve and resource price assumptions, the analysts said.