Part of the group’s success through the year was based on the exceptional margins achieved at its tailings operations, with the Elikhulu and Barberton sites recording all-in sustaining costs (AISC) of $708 and oz and $643 an oz, respectively. Those figures are well down on the overall AISC recorded by the group, but it could be argued that industry-wide improvements to the ways in which gold is extracted from mining waste materials – and the increased commercial importance attached to them – reflects the general fall-away in mining grades in the industry.
One of the most noticeable features of Petropavlovsk’s (POG) full-year production update, published in January, was the improved extraction rates through its processing plants set against the fall in average grades – the amount of gold that can be extracted per tonne – across its mining operations. It is to management’s credit that the Russia-focused miner continues to drive efficiencies, although short of any major technical advance, a lower-grade environment may be the new normal for gold miners.
The average number of gold deposits discovered annually has been in decline since the 1990s, as has the average resource size, while mining grades from new deposits have fallen by a factor of five since the early 1970s. Overall production may have increased, but the number of large, high-grade discoveries appears to be in irreversible decline. And existing large-scale operations, typically mines that can produce at least 200,000 oz a year, make up an ever greater proportion of the total gold produced year on year.
It's not as though the world is running out of gold nor do falling grades automatically make gold mining uneconomical; open-pit mines generally have lower grades than conventional underground workings, but this is usually offset by lower average operating costs. Nevertheless, with average grades in decline, there are reduced incentives for junior precious metals miners, particularly as they now find it harder to finance their activities through public markets, at least compared with the decade leading up to the global financial crisis.
By contrast, there has been no let-up from larger players following the crisis, as global demand stepped up, particularly from the world’s central banks. Volatile prices and dwindling reserves have prompted consolidation in the industry, as larger players look to secure cost synergies and economies of scale. It may be that they now find it easier to simply buy in reserves rather than go to the expense and inconvenience of exploring for the metal.
M&A within the sector hit a record $30.5bn through 2019, helped along by megadeals such as the merger that led to the creation of the world’s biggest gold mining company Newmont Goldcorp (US:NEM). That trumped an earlier deal that saw Barrick Gold Corp (US:GOLD) snap up the assets of Randgold Resources.
The gold price is not only finding support from central bank buying, but also from increased retail participation in the face of rising economic uncertainty. Although the jewellery trade still accounts for around half of the gold demand, it is falling proportionately compared with investment demand.
We think this trend is set to continue, not only in response to the long-term effects of currency debasement, but also due to the increasing incidence of cashless payments. Investors may opt for increased liquidity when valuations for risk assets are under pressure, but what if the cash component of your portfolio amounted to nothing more than digital bytes? The recently published Access to Cash Review warns that the UK is being propelled towards a cashless economy by stealth, devoid of the necessary safeguards in place to protect those who rely on the transferability of physical cash.
A cashless society could give banks and payment providers unbridled power, perhaps leading to the widespread implementation of negative interest rates. Such a scenario might usher in the universal employment of distributed ledger technology (ie blockchain), which would have profound implications for stock markets and securities settlement systems, particularly given that regulatory responses usually lag technological change. All it takes is a system failure to generate demand for physical assets outside of the financial system, gold bullion chief among them.
