Commodities | May 24 2013
– Gold drilling in steep decline
– Gold price much reduced
– Most gold producers remain commercial
By Andrew Nelson
Metals prices are falling and the global economic recovery we were expecting, wide eyed, at the beginning of the year just isn’t playing out. Since 2013 began, the US recovery has stumbled under the weight of sequestration cuts, the Japanese have launched a new and massive round of quantitative easing and the Chinese seem to have shifted into macroeconomic reverse, or at least neutral.
The more this plays out, the worse it seems to get for the mining industry, especially for explorers and the companies that provide exploration services.
All one need do is examine the trends for exploration activity over the past few years and the increasing burden that is being carried becomes more evident. Activity has been trending lower since the end of October all the way back in 2011. Since the beginning of this year the bad times have started to intensify, with gold exploration activity having fallen 55% over the past year.
The latest State of the Market report from mining industry consulting firm IntierraRMG shows there were only 355 drilling reports from global prospects in March 2013 across the entire exploration space. Gold exploration has grown especially weak, with just 172 prospects reporting activity in March. This is well down from the 382 reports in March 2012.
IntierraRMG thinks we won’t see much of an improvement over the next few months, especially given the bottom has been falling out of the gold market since mid-April. This has quickly translated into a significant drop in exploration funding.
There are only two pieces of good news to be taken from all of this. The first is that at least the past six months of falling metals prices followed on from what were historically high levels. The second silver lining is that at least prices are still economical and the majority of gold miners are still generating free cash flow.
The report from IntierraRMG confirms gold is still priced well above the cash extraction cost, at least for most miners. The report shows that even at the recent two-year low, 91% of the 235 gold mines tracked by the company were still enjoying average cash operating costs lower than the heavy metal’s price.
That means 215 of the gold company’s tracked by IntierraRMG were running at average operating costs under US$1,350/oz in 2012. These mines produced a combined 40.8Moz last year at an average operating cost of just US$693/oz. These 215 companies accounted for 97% of the gold output from mines monitored by IntierraRMG.
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