Higher Gold Exploration, Production and Price

Gold has enjoyed a good start to June, with prices higher and the biggest share of exploration for two years. Production of the precious metal also rose in the three months to end-March for the fourth consecutive quarter.

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The past week has been remarkably positive for gold, with the precious metal touching US$1,340/oz on Wednesday, June 5, compared with the May 30 price of under US$1,290/oz. Much of this 3.9% increase appeared to be triggered on Friday, May 31, by President Trump's threat of tariffs on US imports from Mexico (as highlighted in the recent HindeSight). In truth, however, the metal had formed a floor around US$1,280/oz, and a breakout was looking increasingly likely because of the growing concern about the global political and economic scene.

Technical analysis this week from Credit Suisse suggests that gold has formed a new base, although the analysts warned that the metal needs to go above US$1,381/oz for this to be confirmed. To achieve this level, Credit Suisse "suspects" the need for a major "risk off" event (which may have already started), a sharply weaker dollar (possibly also starting) or a further decline in real interest rates.

Whether sustainable, or not, gold is back to the levels of mid-February (helped by a slightly weaker US dollar this week), where it peaked after a six-month bull run from the US$1,175/oz plumbed in mid-August 2018. Gold had a subsequent wobble from mid-February to mid-April before establishing a US$1,275-1,295/oz trading range in late April and May.

Perception of the precious metal is even better in countries with weak currencies. In the UK, for example, gold has just gone through £1,050/oz, and is now threatening its all-time high of £1,130/oz achieved in August 2011. The metal was trading at under £250/oz in June 2005; so has seen an increase of over four-fold in 14 years. It is a similar story from the perspective of gold miners and investors in Australia, where the metal is trading at a new record of over A$1,900/oz. Gold was under A$560/oz in June 2005.

Industry's Reaction

There is an inevitable lag between higher metals prices and the search for new deposits, but conveniently the exploration for gold reached a four-month high in May. According to S&P Global Market Intelligence (SPGMI), global drilling for all metals picked up last month after three consecutive months of falling exploration activity. In SPGMI's latest Industry Monitor report, Christopher Galbraith notes that total projects with reported drilling increased to 197 (although still below last year's monthly average of 255), while the count of all holes reported increased 6% to 3,201.

Gold projects picked up the most, increasing by 18 to reach 127 projects (although the 2018 average was 149 gold projects reporting drilling results per month). Exploration for the precious metal represented nearly 65% of the all-commodities total — the highest share in 23 months.

Separately, SPGMI has reported that gold production increased for the fourth consecutive quarter in the first three months of 2019. Mr Galbraith notes that although the increase was small, at 0.4% over the December 2018 quarter, the March quarter production was 2% higher year over year.

Among 88 gold producers that reported all-in sustaining costs, the average was US$912/oz in the March quarter, 3% higher than the previous quarter but 1% lower than the year-ago period. With gold prices averaging US$1,304/oz during the quarter, the average AISC leaves a gross margin of US$392/oz, which is the highest of the past three quarters and better than any annual average margin of the past five years.

SPGMI also recently released its view on gold production for the next five years. Gold production increased last year for the 10th consecutive year to total 107.3 Moz, and SPGMI expects mined output to reach 109.6 Moz this year. Global gold production is expected to stabilise before falling after 2022 because of a declining reserve base.

More immediately, SPGMI notes that high artisanal gold production in Ghana, coupled with continued growth in the country's industrial gold sector, has raised Ghana's production above South Africa to make it the continent's new biggest gold producer. Gold production in Australia is expected to begin falling after 2021 owing to the depletion of numerous ageing mines, such as St Ives, Agnew/Lawlers, Southern Cross and Telfer.

Leading Gold Producers in 2019* (Moz)

1. China 12.1 (-6.2%, compared with 2018)

2. Australia 10.4 (+4.0%)

3. Russia 10.0 (+10.0%)

4. US 7.1 (+0.4%)

5. Canada 6.8 (+9.0%)

6. Ghana 4.5 (+4.7%)

7. Mexico 4.3 (+17.9%)

8. Peru 4.3 (-7.0%)

9. South Africa 4.3 (+4.7%)

10. Sudan 3.4 (+23.7%).

* Predicted annual production

Source: S&P Global Market Intelligence

Chris Hinde

Chief Commentator, Mining Beacon

Previously editorial director of Mining Journal, and more recently head of S&P Global Market Intelligence's metals and mining team, Chris is now Mining Beacon's editor-in-chief and lead commentator. He posts two blogs every week, one on Monday reviewing market conditions over the prior week, and a second on Thursday looking at issues on the global mining scene. There is also a quarterly blog on business opportunities in the sector.