The hidden crisis in the gold business

This speech at the LBMA’s (London Bullion Market Association) conference in Hong Kong last November will come as a revelation to many gold owners. Delivered by Barrick’s CEO Jamie Sokalsky, it wades into a largely hidden crisis in the gold business — static mine production that has not responded positively to the rising prices over the last several years, and is unlikely to ramp up even if prices go higher from here.

Read this, my friends. The numbers are worth processing.

Sokalsky tells it like it is:

“There are very few mega-sized gold mines currently in production in the world. In terms of a cross-section of total gold mines by size, there are about 400 gold mines producing. Only 156 of these, or about 40%, produce over 100,000 ounces per year. . .Twenty-one mines produce over 500,000 ounces per year. . .Only six mines produce over 1 million ounces. . .It is also interesting to note that although there have been some gold discoveries, none can be described as a super giant — that 20-million-plus ounce deposit. They are harder to find and that is directly impacting production growth because those super-giant discoveries are really the ones that can have a material impact on supply.”

Mine supply, according to Thomson Reuters GFMS, is pretty much unchanged over the past decade — from roughly 85 million ounces in 2001 to 90 million ounces in 2011. This is not a projection; it’s reality.

Parenthetically, Barrick got some bad news in late April, when its Pascua Lama project — a 17.9 million ounce deposit (mega, in Sokalsky terms) that straddles the Chile-Argentina border — was ordered closed by Chilean courts for environmental reasons. The trouble came after Sokalsky’s speech to the LBMA, so the outlook for global gold production is even tighter now than it was then. Work continues on the Argentina side, but Barrick says it might be forced to suspend spending on the mine if the regulatory issues “remain unclear,” according to a Reuters report. Though there is always a possibility that the court decision might be reversed, Barrick’s problems at the Chile-Argentina border underscore the high risks in the mining business, as pointed out by Sokalsky in his speech. Even strategically important mega-projects like the Pascua Lama can be derailed unexpectedly by exogenous events.

When you weigh the production problems against the growing global demand, you get a sense that something has to give somewhere. This largely hidden crisis is one of the strongest arguments in favor of accumulating physical metal for the long-term I know of, and one not often mentioned by gold advocates who tend to concentrate on the monetary reasons for gold ownership. Sooner or later though, the fundamentals will assert themselves.

Sokalsky ends his speech with this:

“This industry is like a supertanker. It takes a long time to stop or change directions. You cannot turn on a dime. Most projects that are built right now, or are in advanced construction, will not be affected. However, the outlook for growth in supply in a few years looks more and more under threat. Thus, the supply of gold is likely to be lower going forward. We are not going to see huge growth, even if the gold price goes up considerably.”

It sounds like he was blind-sided by the Chilean court decision. The Pascua Lama was in “advanced construction” at the time of the closure. Barrick had spent “up to $8.5 billion” on the project, according to that same Reuters report.

Link to Sokalsky speech

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