Demand for gold will remain strong in the years to come given the demand for jewelry, bars and coins as well as its safe-haven appeal. Yet the gold mining industry is saddled with a number of headwinds. Below, we discuss some of the key challenges and what investors in the sector can look forward to in the coming months and years.
Lack of New Projects, Production to Flatten
Annual mine production grew for the sixth straight year in 2014, edging up 2% to a record 3,114.4 tons. However, after a long period of growth, gold production dipped by 1% in the third quarter of 2015. While output is slowing down from older mines, particularly in South Africa and the U.S., it is in contrast to the incremental impact on production from new mines coming on stream.
Previously, incremental production from newer mines led to continued growth in overall gold production. However, newer mines are now at or near their full potential and thus growth rates are slowing down, making further production gains increasingly difficult.
After a period of implementing cuts to spending on capital and administration, much of the recent cost reduction has come from lower oil prices and favorable exchange rate moves. Reduced spending on exploration and development has already taken its toll on the production pipeline and will further squeeze production over the coming quarters.
Some gold companies, including Barrick Gold Corp. (ABX – Analyst Report), Goldcorp, Inc. (GG – Analyst Report) and Newmont Mining Corp. (NEM – Analyst Report), are currently high-grading at certain mines. The high-grade portion of a mine is mined first as this increases the grade of the mined ore and lowers cost per unit. However, it has its pitfalls as it depletes reserves very quickly, thus affecting long-term supply.
Gold miners, grappling with low gold prices and cost pressure, have not been in a position to invest in new projects in recent years. Companies including AngloGold Ashanti and Agnico Eagle Mines Ltd. (AEM – Analyst Report) have slashed capital and exploration spending. Given the lack of new projects, mine production will eventually reach a plateau in the next couple of years.
Restricted Margins
The price decline added to the woes of an industry that was already fighting rising costs, labor issues, strikes, delays and/or the cancellation of projects. If prices fall further, margins will be constrained as the price of gold closes in on the cost per ounce of the companies. In the wake of falling prices, the industry would see a rise in the number of producers reducing output or even shutting down operations.
Companies are collaborating with other miners to help recoup previous losses. However, costs are difficult to curtail beyond a point, so miners will only profit if gold prices rise in response to demand and other macroeconomic factors. Production cutbacks and mine closures would spell more financial pain for producers and investors, who have watched gold mining stocks slump.
Gold Substitutes in the technology Sector
Demand for gold in technological applications dipped 1% year to date, affected by sluggish economic conditions in key markets and substitutes found for the metal. Despite inferior durability, copper and palladium-coated copper have made vast inroads into the share of gold in the bonding wire sector.
As per the last data by the World Gold Council, gold witnessed a decline of 4% in dental demand in the third quarter of 2015, the worst performance on record. The decade-long decline in the dental sector shows no sign of abatement as gold continues to lose ground to ceramic alternatives, which have improved steadily in quality, strength and durability.
