Gold Miners Must Invest $37 Billion Over Next Five Years To Maintain Pre-Covid-19 Production Rates

The global gold mining industry will have to invest $37 billion in exploration by the year 2025 just to maintain pre-covid-19 production levels from 2019.

Research firm Wood Mackenzie estimated that the mining sector has to find about 8 million ounces [250 tons] of gold – equivalent to developing about 44 projects -- by 2025 to maintain 2019 production levels.

Rory Townsend, head of gold research at Wood Mackenzie, said: “Prior to the coronavirus outbreak, peak gold supply was becoming a real possibility. Now, with exploration programs paused or cancelled and project disruptions hampering production, the summit is in sight.”

Townsend added: “If all our probable [gold] projects were to come online before 2025, this would almost meet the requirement to maintain 2019 production levels. The likelihood, however, is that we [will] see some degree of slippage among a number of these assets due to permitting delays, prioritization of other capital projects and changes in scope.”

Townsend suggested that smaller mining projects – which require less capital and are easier to permit -- might help to close the impending production gap.

“At a time of heightened economic uncertainty, the largest gold projects may struggle to secure financing until there is more clarity,” Townsend said. “Smaller projects are proving an exciting proposition. They have the advantage of a lower initial capital outlay and can be typically brought online with speed and efficiency, particularly open pit deposits and mines that have previously been in operation. The drawback to these projects, however, is the fact that they will struggle to nudge the needle for a material gold producer.”

Townsend conceded that identifying new mining projects has been difficult in some countries.

“Social and governance considerations are dissuading the exploration of certain jurisdictions and the progression of identified deposits,” he said. “Investment and exploration in countries such as South Africa has all but dried up, with the gold mining industry plagued by power outages, labor strikes and regulatory uncertainty. This has prompted investors and miners to consider countries they deem to be more mining-friendly.”

Townsend indicated that Ghana has been a “significant beneficiary” of South African woes and overtook South Africa to become Africa’s largest gold producer on the continent in 2018.

On the whole, Wood Mackenzie identified about 260 projects around the world that gold miners and investors should seek out.

“Given the size of the resource that is available to be developed, talk of peak gold supply may seem a little surprising,” Townsend said. “Crucially, however, it is not the lack of gold that is the constraint. Gold miners and investors are carefully searching for the deposit that is ‘just right’ in order to allocate capital.”

Fitch Solutions, a unit of Fitch Ratings, said in a recent report that global gold production growth will rebound in the coming years due to higher gold prices and mergers between major mining companies.

“We forecast global gold production to increase from 106 million ounces in 2020 to 133 million ounces by 2029, averaging 2.5% annual growth,” Fitch stated. “This would be an acceleration from the average growth of just 1.2% over 2016-2019.”

Fitch also projected that Russia will overtake China as the world’s top gold producer by 2029.

Russian mines will produce 11.3 million ounces in 2020 and expand output to 15.5 million ounces in 2029 – an average annual growth rate of 3.7%.

By the end of the decade, Russia will account for 11.6% of global output, up from 10.6% in 2020.

“The rising risk of Russian state banks being frozen out of dealing in dollar-denominated assets… as bilateral relations remain strained is pushing the Russian central bank to increase its holdings of gold. As long as tensions with the U.S. remain, domestic demand for gold is set to remain,” Fitch stated.

Another top gold producer, Australia, is expected to see a 2.2% average annual growth production rate over the coming years – rising from 11.7 million ounces in 2020 to 14.2 million ounces by 2029.

Australia’s gold production will receive a huge boost from OZ Minerals’ Carrapateena copper gold project, one of the largest mines being built down under.

As far as China is concerned, their output has been constrained by strict environmental regulations on solid waste from gold prospecting. These measures have prompted a wave of gold mine closures and output declines in important mining provinces like Shandong, Jiangxi and Hunan.

“We forecast China’s gold production to remain roughly stagnant during 2020-2029, with an average annual growth rate of 0.2%,” Fitch stated. “This marks a notable slowdown compared with the average annual growth of 3.1% over the previous 10-year period. Nonetheless, the country will remain the largest global producer of gold ore by a significant margin.”

In fact, Chinese companies are pushing up investment in foreign gold mines, as Chinese gold demand far surpasses domestic production.

“Key deals in recent years have included Chinese firm Shandong Gold’s purchase of a 50% stake in the Veladero mine in Argentina from Barrick Gold (GOLD) for $960 million,” Fitch noted. “The firms will also work together on exploration activities in the area.”