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Barrick CEO Jamie Sokalsky has some things to say
about the gold mining business that will come as a revelation to many gold
owners. In a speech at the London Bullion Market Association’s
conference in Hong Kong last November, Sokalsky
wades into a largely hidden crisis in the gold business — static mine
production that has not responded positively to the rising prices over the
last several years, and is unlikely to ramp up even if prices go higher from
here.
“There are
very few mega-sized gold mines currently in production in the world,”
said Sokalsky. “In terms of a cross-section
of total gold mines by size, there are about 400 gold mines producing. Only
156 of these, or about 40%, produce over 100,000 ounces per year. .
.Twenty-one mines produce over 500,000 ounces per year. . .Only six mines
produce over 1 million ounces. . .It is also interesting to note that
although there have been some gold discoveries, none can be described as a super giant — that 20-million-plus ounce deposit.
They are harder to find and that is directly impacting production growth
because those super-giant discoveries are really the ones that can have a
material impact on supply.”
Mine supply,
according to the U.S. Geological Survey, is pretty much unchanged over the
past 12 years — from 2560 metric tonnes in
2001 to 2700 metric tonnes in 2012. There was a dip
in 2008 to 2280 metric tonnes.
Parenthetically, Barrick got some bad news in late April, when its Pascua
Lama project — a 17.9 million ounce deposit (a near “giant”
in Sokalsky terms) that straddles the
Chile-Argentina border — was ordered closed by Chilean courts for
environmental reasons. The trouble came after Sokalsky’s
speech to the LBMA, so the outlook for global gold production is even tighter
now than it was then. Work continues on the Argentina side, but Barrick says it might be forced to suspend spending on
the mine if the regulatory issues “remain unclear,” according to
a Reuters report.
Though there is
always a possibility that the court decision might be reversed, Barrick’s problems at the Chile-Argentina border
underscore the high risks in the mining business as pointed out by Sokalsky in his speech. Even strategically important
mega-projects like the Pascua Lama can be derailed unexpectedly by exogenous
events.
When you weigh the
static global gold production against the growing global demand, you get a
sense that something has to give somewhere. The supply fundamentals are one
often overlooked by gold advocates who tend to concentrate on the monetary
reasons for gold ownership. Sooner or later though, the tension between
supply and demand will assert itself.
Sokalsky ends his speech with this:
“This industry
is like a supertanker. It takes a long time to stop or change directions. You
cannot turn on a dime. Most projects that are built right now, or are in
advanced construction, will not be affected. However, the outlook for growth
in supply in a few years looks more and more under threat. Thus, the supply
of gold is likely to be lower going forward. We are not going to see huge
growth, even if the gold price goes up considerably.”
It sounds like he
was blind-sided by the Chilean court decision. The Pascua Lama was in
“advanced construction” at the time of the closure. Barrick had spent “up to $8.5 billion” on the
project, according to that same Reuters report. Creamer Media’s Mining
Weekly reports that Barrick has made reactivating
the project its number one priority, but that “many experts say the
unpopular project faces an uphill battle.”
Link to Sokalsky speech
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Commentary & Analysis is edited by
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This is an update of
a post that first appeared on this page May 7, 2013.
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