One of the most profitable producers of gold is of the view that by 2020, there would be a tightening of gold supplies globally which would push the gold industry at the edge of a cliff – that for an industry that is seemingly obsessed with containing costs and minimizing risks.
Randgold Resources Ltd. Chief Executive Officer Mark Bristow said that there has been very little investment by the Gold industry in exploration or sustaining capital despite the industry clawing back from the lows that it had found itself in 2015. He said that when the true extraction costs are taken into account, nearly half of the world gold that is being excavated from the ground is not profitable to mine.
“The one thing this industry does very well is mine gold at a loss,” Bristow told analysts at a breakfast meeting in Toronto.
He said that the use of all-in-sustaining costs instead of cash costs is the focus of the industry which is masking the weakening outlook. The CEO said that the asset quality of a gold mine is eroded in the long run as companies attempt to lower AISC and boost earnings through the strategy of reducing spending to sustain operations or by the process of tightening of exploration budgets.
In a similar manner, the life span of a gold mine has been shortened by focusing on the best quality ore which is also known as high-grading, which has also caused severe damage. Bristow said now the average grades of gold is about 1 gram for every ton from the 2.5 grams a ton in about 2007.
Executives and board have been failed to held accountable due to the use of proxies by fund managers, according to Bristow, for the poor performance of companies in the industry. similar sentiments were echoed in September by billionaire John Paulson, whose firm gave a call to create a coalition of gold investors to stop the years of value destruction.
Since 2010, there has been a lost value to the tune of about $85 billion, cited Paulson’s presentation. However, he listed Randgold among the companies that are offering the best shareholder total returns.
But the strategy of Shareholder’s Gold Council, as prescribed by Paulson, is not the best way to clean up the industry, Bristow said.
“Management can’t be overly reckless with capital if it’s not allowed to be,” he said. “What’s missing there is a recognition that fund managers have been equally, or more reckless. I’m not sure that creating another club is the right approach.”
He also said that there is a presence of too many junior miners who have single short-lived assets and this means that the industry needs.
He added that in the eventuality that the gold prices remain between $1,000 and $1,400 an ounce, there is likely to be a very significant supply shortage in the industry from 2020.
He said that input costs probably will rise as “you’ve got a complete over-inflation of value in just about every asset class and industry in the world, with burgeoning central bank balance sheets.”
“It would have just been very nice for the gold price to stay at $1,040 for another six months so it would clean the industry up,” Bristow said. “It just was too short-lived, that low gold price.
(Adapted from Bloomberg)