Goldcorp and Newmont, two gold mining giants have just announced a merger earlier this month. It is expected that this merger will encourage other gold mining companies to do the same in order to pool resources to bet to the high-grade deposits and share the ever-increasing costs of extraction that has been squeezing profit margins. The merger of Gorldcorp and Newmont knocks Barrick Gold that merged with Randgold off the pedestal of being the biggest mining company in the world.
Consolidation of gold mines began with the takeover of Randgold by Barrick in September. The deal was said to be worth $6.5 billion. Gold mines have been struggling for years now. The sudden rise of gold to $1,900/oz. in September gave some hope but it was short-lived. The price plummeted and the rising cost of production eroded profit margins, forcing some mines to scale down.
The price of gold has been affected by the appreciation of the US dollar and in 2018 it went down by 5%. However economics and world events aren’t the only problems that the mining sector has to be aware of. The industry is facing a bigger problem: that gold is now harder to find. The supply of gold has been shrinking and miners are having to dig deeper to get to the gold or start mining in remote locations. This means the cost of production has to go up because you need more equipment or better equipment than what’s worked well for decades. High extraction costs are the cause of production falling from 4,398tonnes in 2017 to 3,268.7 tonnes in 2018. Even recycled gold fell by 10% to 1,160 tonnes in 2018. China, which for years has been the world’s biggest producer saw the most drop in production between 2017and 2018.
Barrick, Newmont and Goldcorp- the three largest gold mining companies reported an output that was less 15% in 2018 when compared to the output recorded in 2017. As this was happening, the price of oil went high meaning cash flow fell as well.
The fall of production in gold mines has been a trend for awhile now. South African gold mines produced 250 tonnes of gold less than what they were producing at when they were at their height in the 1970s.
Production is falling mainly because of the low grade gold that miners are getting out of the ground. Barrick Gold produced more gold from its Nevada operation. In 1998 it could extract 9.6 grams of gold per tonne of ore mined. As the company added more mines, production rose to 8.6 million ounces of gold per tonne of ore in 2006. On average the grade was around 1.71 g/t. The production grade fell to about 1.68 g/t in 2017 and it isn’t improving.
The lower the grade of gold ore being mined the higher the production costs. To illustrate: in 1998 Barrick loaded about 55 trucks a day to move 2.3 million ounces at its Cortez and Goldstrike mines. In 2017 the number of trucks required to move the same amount of gold had risen to 220. That is four times the amount it took to move ore a decade ago. More trucks mean more fuel spent, extra labour and extra processing costs.
Production from the top three mining companies -Barrick, GoldCorp and Newmont fell by 15% between 2017 and 2018. Barrick lost the most. It reported a decline in production of over 20%. Goldcorp fell by 10% while Newmont reported a 9% drop over the same period.
In the first quarter of 2018. the combined free cash flow for all three companies dropped from $718 million to $38 million. Of the three companies, Goldcorp was the most distressed. The $10-billion Deal with Newmont helped raise the share price which had plummeted from $54 in 2011 to $12.86 in 2018.
Goldcorp had made a number of bad decisions over the years like overestimating certain mines production like the Eleonore project that produced only 350,000 oz. instead of the 600,000 ounces it was expected to produce in 2018. And then there was the underwhelming production figures from its Coceneur development in Ontario and Kaminak Gold. All these projects cost more than they were worth. In 2017 the mining company paid more than half a billion dollars for a stake in the Chilean Cerro Casale and then again put money in another Chilean mine called Caspice that underperformed.
Merging these three behemoths gives the new entity an edge over other large companies like Newcrest AngloGold Ashanti and Kinross. This deal means the mining companies have to restructure and even sell some assets to get more money into the project. Already Newmont announced a sale of assets that are worth $1.5 billion over the next two years.
There is definitely a reduction in the number of large mineral finds. In the 70s, 80s and 90s the mining industry was finding countless gold deposits greater than 50 million ounces, these days it is hard to come by at least 15 million ounces. With discoveries by larger mining companies tapering off, the future lies with smaller operations.
What does this mean for the ordinary man on the streets looking to sell of buy gold? Well, less gold means higher prises. If there are no more large gold deposits, then the price of gold will continue to rise. Merging companies like GorldCorp, Newmont and Barrick might ensure the continued life of certain mines, but it still does not halt or lessen the depletion of this precious metal or improve the quality of the product.
Sources:
- https://www.businesslive.co.za/bd/companies/2019-01-14-newmont-to-buy-goldcorp-as-mergers-return-to-gold-industry/
- https://www.mining-technology.com/features/2019-januarys-top-news-stories-mining/
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