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Expenditure Analysis of the South African Gold Mining Industry
Frost & Sullivan, Dec 2009, Pages: 96
This research service is an analysis of capital and operational expenditures in South Africa's gold mining industry with the objectives of understanding capital expenditure patterns of the industry, expansion projects of key industry participants, major cost drivers of the expansion projects and equipment needs of the industry. The rising gold price and the healthy balance sheets posted by the country's gold mining companies in recent years have put them in good stead to commit considerable amounts of money towards capital expenditures. Capital expenditures were expected to decline sharply as mining companies shelved major expansion projects to preserve cash.
- Existing empirical data surrounding global gold supply and demand patterns point towards increasing investment and fabrication demand on one hand and diminishing supply sources on the other.
- Global new mine supply of gold has been declining over the past decade, despite the rising gold price and firming investment and fabrication demand.
- The lean times experienced in the natural resources industry globally between 1997 and 2002 when commodity prices were low are responsible for the decreasing production levels and depleted mineral reserves.
- Existing gold mines are on the verge of running out of proper grade ore, given that the average golden mine has a lifespan of ten years.
- Although the reasons for the decline in gold production vary from one country to another, the commonest include the following:
- Reduced exploration spending
- Lack of new major discoveries
- Permitting and construction challenges
- Declining ore grades
- Long lead period periods between construction and commissioning of new mines
- Rising operating costs pressures
- Operational difficulties such as electricity and skills shortages
- Junior gold mining companies with large inground resources that can be economically exploited are fast becoming prime takeover targets of the major mining companies eager to replenish their dwindling ore reserves.
- The global financial crisis in 2008 also took its toll on the gold mining industry, as most of the marginal mines were closed and expansions projects were put on hold as credit availability dried up.
- Diminishing exploration spending, declining ore grades, dearth of expansion projects and rising operating costs are likely to keep global gold production depressed in the short to medium term.
- Although exploration companies have increased their spending in relatively under-explored countries that have huge potential for new green-field ventures, expansion projects will take longer to become operating mines.
- Producer de-hedging is also likely to continue in the short to medium term, as mining companies seek to increase their exposure to rising gold price.
Global Gold Supply Outlook
- Global new mine supply of gold is likely to remain flat or at best showing small incremental changes.
- Expansion projects that are long term in nature are unlikely to add to production in the near term and most of the long-term expansion projects have been temporarily suspended owing to the uncertain global economy.
- There are no new major mines that are likely to be opened globally in the next three years, with the exception of the Burnstone mine in
South Africa.
- Technical and operational constraints in major gold producing nations such as South Africa, the United States and Australia will restrain gold production in the short to medium term.
- Increasing operating costs pressures, declining gold recovery grades and maturing mines will continue to dampen efforts by mining companies to ramp up production.
- High energy and labour costs will result in reduced profits for the gold mining industry.
- The unavailability of credit in many parts of the developed world in 2008 resulted in mining companies curtailing expansion projects and dropping marginal operations.
- High gold prices are likely to keep gold recovery operations from scrap high, whilst central bank sales are likely to be low.
- Most of the central banks holding huge quantities of gold may prefer to hold on to those stocks in a period of widespread economic uncertainties.
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