Prior to the coronavirus outbreak, peak gold supply was becoming a real possibility. Now, with exploration programmes paused or cancelled and project disruptions hampering production, the summit is in sight.
As organic growth is waning, miners are looking to buy gold through mergers and acquisitions to secure their future. So far this has failed to significantly increase production.
To avoid a perpetual decline in gold supply, the industry must see a rise in project development.
Wood Mackenzie estimates the industry will need to commission 8 Moz (262t) of projects by 2025 to maintain 2019 levels of production. This equates to roughly 44 projects.
Based on the average project capital intensity of $4,610/ozpa Au, Wood Mackenzie estimates the industry must invest approximately $37 billion on greenfield projects and restarts over the next 5 years.
“If all our probable projects were to come online before 2025, this would almost meet the requirement to maintain 2019 production levels. The likelihood, however, is that we see some degree of slippage among a number of these assets due to permitting delays, prioritisation of other capital projects and changes in scope,” said Rory Townsend, Wood Mackenzie Head of Gold Research.
So, where will this supply come from and who will be willing to make the investment?
“Social and governance considerations are dissuading the exploration of certain jurisdictions and the progression of identified deposits.
“Investment and exploration in countries such as South Africa has all but dried up, with the gold mining industry plagued by power outages, labour strikes and regulatory uncertainty. This has prompted investors and miners to consider countries they deem to be more mining friendly.
“Ghana has been a significant beneficiary of this and overtook South Africa to become the largest gold producer in Africa in 2018,” added Townsend.
Wood Mackenzie has identified around 260 projects that gold miners and investors could turn to.
“Given the size of the resource that is available to be developed, talk of peak gold supply may seem a little surprising.
“Crucially, however, it is not the lack of gold that is the constraint. Gold miners and investors are carefully searching for the deposit that is “just right” in order to allocate capital,” said Townsend.
Which projects are expected to be the most coveted?
At a time of heightened economic uncertainty, the largest gold projects may struggle to secure financing until there is more clarity.
Miners wishing to benefit from this period of elevated prices may have to consider joint ventures and phased approaches to commission these larger deposits or risk missing the window of opportunity.
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If miners do not capitalise on gold’s heightened allure through this bull cycle, Wood Mackenzie says these projects will either continue to trudge toward production for years to come or be rescoped.
Meanwhile, smaller projects are proving an exciting proposition. They have the advantage of a lower initial capital outlay and can be typically brought online with speed and efficiency, particularly open pit deposits and mines that have previously been in operation.
The drawback to these projects, however, is the fact that they will struggle to nudge the needle for a material gold producer.
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