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When Steve Parsons and his colleagues published their first report on the gold “production cliff” in early 2013, they thought the thesis was obvious, even though almost no one was talking about it.
“It’s not a matter of if or even when the production cliff will happen,” the National Bank analyst said in an interview this week. “It’s really a matter of how companies respond.”
Gold miners hardly ever spoke up on this issue over the last several years. It may be that they didn’t agree with the conclusion, or perhaps they just didn’t want to think too hard about the implications. But there’s no avoiding it now.
Parsons’ thesis, in short, is that global gold production is set to fall in a big way. He calls it the “production cliff” while Goldcorp Inc. and others call it “peak gold,” but it amounts to the same thing.
The cliff appears to be imminent. According to numerous professional estimates, gold output will top out in 2015 or 2016 and then go into decline for several years at least. Using consensus figures, Goldcorp estimates that global production will drop six per cent in the next three years, and almost 18 per cent in the next nine years.
This may seem mind-boggling to the casual investor who watched hundreds of gold companies pop out of the woodwork during the bull market from 2000 to 2011. But it speaks to the numerous challenges facing the sector. There has been a shortage of new discoveries in the past decade, leaving the industry’s pipeline relatively bare. At the same time, companies have been deferring or canceling projects because the execution risk is just too high. That is due to soaring construction and operating costs, political risk, permitting challenges and numerous other factors.
And of course, gold prices have plunged almost 40 per cent in the past three years. That accelerated the move to the production cliff because miners have been forced to shelve many big projects. They have also focused on higher-grade ores at their mines, which means their reserves and mine lives are shrinking fast.
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