Iamgold, the gold producer with mines in Canada and Mali, says the metal will rise to a record $2 500 (R21 906) an ounce as global output peaks and ore grades decline.
The industry had exploited its best-quality gold reserves and was being forced to tap lower-grade and higher-cost deposits, Iamgold chief executive Steve Letwin said last week. “I really think now we are at Peak Gold. Nobody has seen the kind of production profiles they thought they were going to see.”
He said Iamgold could prosper in such an environment because it had available cash, low debt and experience running mines where ore was less rich. “There will be a transformation here and our job is to stay lean and mean, keep our balance sheet strong and stay alive to see the benefits,” Letwin added.
Global gold production in the first nine months of 2012 fell 1 percent from a year earlier to 61.5 million ounces, according to data compiled by Bloomberg.
The average ore grade of reserves at 12 large producers including Iamgold fell 51 percent to 0.028 ounce a ton in 2011 from a decade earlier, the data show.
“One of two things has to happen” for gold miners, Letwin said. “Either we stop as an industry pursuing it because the costs keep rising at a faster rate than the price, or the price of gold has to go up to reflect the cost inflation.”
Declining ore quality and rising mine development costs have sent gold production costs soaring and curbed profitability. That has also forced miners to explore and work in more remote or politically unstable parts of the globe.
Among its global assets, Iamgold owns stakes in two mines in Mali, where insurgents have seized control of the north. French troops intervened in the west African nation last week to reverse an advance by the rebels, and European and US policy makers have expressed concern north Mali may become an Islamist militant base that would destabilise regional states from Nigeria to Algeria.
Letwin said his preference was to stay in Mali, and he would consider buying out the 41 percent of the Sadiola mine controlled by AngloGold Ashanti, which is the mine’s operator. Iamgold also owns 41 percent of Sadiola.
“My preference would be to buy it, I’m not afraid of Mali, even with everything that’s going on there. If the price was right we would look hard at increasing our interest in Sadiola,” he said.
Globally, the gold mining industry has been beset by rising costs and budget overruns in the past year at firms including Barrick Gold, the world’s biggest. The gold mining industry has fallen out of favour with investors.
Gold for delivery in February was little-changed at $1 683.20 an ounce in New York on Wednesday. The metal has advanced for 12 consecutive years and traded at a record $1 923.70 in September 2011.
“I really do believe, unless the demand for gold drops, you are going to have to see $2 500,” said Letwin. He said he could not give a timeframe for the rise to $2 500.
Gold production had failed to respond to surging prices and demand, said Kenneth Hoffman, a Bloomberg Industries analyst.
“The reason that there is no supply response is that there is just not the metal out there to find,” Hoffman said. “Finding good, high-quality gold mines that can put out a significant amount of product is almost impossible.”
The notion of Peak Gold output echoes the Peak Oil theory, which holds the earth is running out of crude and production will stop rising before declining. Most gold is used as a store of wealth and very little is used in electronics and other industrial applications, said Phil Streible, a commodity broker at RJ O’Brien & Associates.
“Peak Gold can be misleading as, unlike oil, gold is not consumed and the amount of gold above the earth increases every year,” Streible said.
Letwin said the largest gold miners “need to replace production, and as much as they find it vulgar they are going to have to go to lower-grade”.
Iamgold, which is also expanding its Essakane mine in Burkina Faso and considering growth options at Rosebel in Suriname, expects to declare commercial production at Westwood at the end of March. Iamgold also owns a niobium mine in Quebec, where it’s seeking a partner to help fund an expansion to boost output of the rare metal used in high-strength alloys.
While Iamgold’s balance sheet was “a positive”, one reason the company did not have a lot of debt was that it was not building any new mines until it started work on Cote Lake, which limited its output growth potential until then, Michael Scoon, a Toronto-based analyst at Stifel Financial, said on Wednesday. – Bloomberg