While a number of challenges continue to affect the gold mining industry, supply and demand for the metal added more than $210 billion in value to the world’s major gold producing and consuming countries last year – similar to the gross domestic product of Ireland, according to a new report
On the demand side, gold for investment purposes represented more than a third of global demand last year, including physical bars and coins, gold ETFs, over-the-counter investment, and stock flows, according to the Direct Economic Impact of Gold, a report by PwC, commissioned by the World Gold Council, whose members include Barrick Gold
(GG), and Newmont Mining
(NEM). The report examined the impact of gold on the global economy, looking, for the first time, at the entire value chain -- including mining, refining, and fabrication and consumption.
Global gold supply reached 4,477 tonnes in 2012, with approximately two-thirds coming from mining and one-third from the recycling of gold, says the report, adding that the gross value added (GVA) per tonne of recycled gold is approximately $16 million compared with approximately $36 million for gold produced from mines.
The 15 largest gold-producing countries, which include Canada, the United States, and China, accounted for around three-quarters of global output, generating $78.4 billion of GVA in 2012, which PwC says is approximately equal to the GDP of Ecuador, or 30% of the estimated GDP of Shanghai.
In spite of these figures, the report also points to the “converging challenges” facing the mining sector at the moment -- including increasing costs, higher expectations from a variety of stakeholders, and a gold price, which it says could “call in to question the viability of some projects and lead to a contraction in supply.”
Philip Klapwijk, managing director of Hong Kong-based Precious Metals Insights Limited, says that budget cuts by the mining industry will take time to be reflected in lower mine output.
Indeed, this year, he adds, global gold mine production should still rise slightly compared to 2012, partly because cost pressure on the miners is not yet sufficient to force closures of existing operations.
“Nearly all mines have cash operating costs below $1,300. So, even though on a fully costed basis a good chunk of the industry is not, strictly speaking, profitable at prevailing prices, it is not bleeding cash. Companies will not shut down operations they have invested heavily in if they believe they can ride out a limited period of low prices,” he says.
But in addition to the price slump, crushing margins, and lower share prices, Klapwijk points to another issue that the mining industry is grappling with: reserve depletion.
“All the larger companies are seeing an ongoing erosion in their reserve base. Exploration success has been very patchy in spite of the large sums invested and has certainly, as a rule, failed in terms of replacing ounces that have been and continue to be mined. Besides this, pressure on gold companies only increases in terms of environmental legislation and obligations, resource nationalism, and, associated with this, heavier fiscal pressures,” he adds.
In its report, PwC points to the need for further research to gather mine or country-level data to improve the quality of the estimates showing the impact that the supply of mined gold has on both employment and investment.
“With the global mining sector facing challenging times and increasing costs, transparency is vital -- and this research is important as it examines the economic value generated by gold and where that value is created,” says Jason Burkitt, PwC UK mining leader.
No positions in stocks mentioned.