Gold Miners See Looming Output Drop After Cut in Spending

The biggest gold producers say global output will fall short of expectations and is poised to decline after the worst price slump in three decades spurred them to cut spending and revise mining plans.

Barrick Gold Corp., Goldcorp Inc. and Newmont Mining Corp., the three biggest producers by market value, say the industry has changed after gold plunged 28 percent last year. The decline forced miners to take at least $30 billion of writedowns.

“The industry has gotten more disciplined,” Barrick Chief Executive Officer Jamie Sokalsky said in a Feb. 24 interview. “We are in an inflection point now where I think ultimately gold production in the industry could start to decline more than people think.”

Sokalsky said lower mine output may support gold prices. Demand for physical metal is growing in China, according to Sean Boyd, the CEO of Canada’s Agnico Eagle Mines Ltd. Central banks, net purchasers for four straight years, will keep buying, he said in an interview. The outlook for gold will be on the minds of many at the annual Prospectors & Developers Associated of Canada convention which began yesterday in Toronto.

Gold fell 0.4 percent to $1,326.39 an ounce on Feb. 28 in London. After posting its biggest annual loss in 32 years, the metal is up 10 percent in 2014.

“I think we can start to move back above $1,400, $1,500 very easily this year,” Sokalsky, 56, said last week in Hollywood, Florida, where he and Boyd were attending a mining industry conference. The median of analysts’ estimates compiled by Bloomberg is for bullion averaging $1,210 an ounce this year and $1,215 in 2015.

No Consensus

“We’ve seen the lows for gold and we’re seeing a lot of fundamentals in the marketplace that should be very supportive,” Sokalsky said.

There’s no clear consensus among producers about when exactly mine supply will start declining. McEwen Mining Inc. Chairman and CEO Rob McEwen sees it falling this year and Goldcorp CEO Chuck Jeannes wouldn’t be surprised if that were the case, they said in separate interviews. Newmont CEO Gary Goldberg predicts output will rise in 2013 and fall after that.

That places the gold industry at odds with projections from Barclays Plc. Mine supply will rise to 2,787 tons in 2014 and to 2,838 tons in 2015, after a 3.4 percent increase last year, Barclays analysts including Gayle Berry said in a Feb. 12 note. Output climbed in 2009 through 2012, data from the U.S. Geological Survey data show.

“My experience is that those prognosticators are usually wrong on the high side,” Jeannes said in an interview in Hollywood.

M&A Drop

By its very nature, the gold-mining industry is constantly depleting its own assets. Every producer faces the challenge of how to replace the gold it extracts, either by discovering new deposits and developing them into mines -- a process that sometimes can take decades -- or by buying rivals.

Both strategies have come under pressure after tumbling gold prices destroyed earnings. There were 236 acquisitions of gold companies last year, the least since 2008, according to data compiled by Bloomberg.

Development spending is being curtailed. After reviewing its operations last year, Barrick suspended work on its $8.5 billion Pascua-Lama project on the Argentina-Chile border, citing legal and regulatory uncertainty as well as lower gold prices.

Barrick revised operating plans for existing mines too. Using a new, lower assumed gold price of $1,100 an ounce, some higher-cost ounces that previously would have been mined may now stay in the ground.

Exploration Cuts

Exploration spending across the industry is being cut “dramatically,” which will affect future supply, Coeur Mines Ltd. CEO Mitch Krebs said in an interview in Hollywood.

Small exploration and development companies that survive on fund-raising are struggling to raise money for operating and construction. About 300 such companies each had on average $4.7 million in cash based on their most recent filings, less than half the level two years ago, according to Bloomberg data.

The recycling of gold, which accounted for 35 percent of supply in 2012, according to GFMS data, is also under pressure after the decline in prices last year reduced the incentive for sales. There will be less scrap coming into the market, Newmont’s Goldberg said.

“I always point out the guy rotating the little sign on the street corner: ‘We buy gold’,” he said in an interview in Hollywood. “You don’t see him so much out there anymore.”

To contact the reporter on this story: Liezel Hill in Toronto at lhill30@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net

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