Gold Mining Supply 2009

IT'S NO SECRET going into 2009 that gold mining supply worldwide has failed to grow during the seven-year bull market in gold – and failed badly.

Global gold mining output peaked in 2003. Even the record gold price of 2008 saw world supply fall.

Can the gold mining sector turn things around in 2009?

#1. Gold Mining Politics in 2009
Any natural resources boom attracts "rent seeking" by governments hungry for cash. The gold mining industry also faces political opposition from environmental "green" lobbyists in 2009, too.

Last year, for example, saw Canadian gold-mining firm Crystallex lose control of key sites in Venezuela, effectively shut down by the socialist government of Hugo Chavez, after spending a fortune trying to secure the necessary licenses.

Over in Europe, meantime, the continent's largest gold mining reserves – at Rosa Montana in Romania – became off limits to Gabriel Resources just before the start of 2009, after a court in Bucharest declared its archaeological surveys of the historic area inadequate.

#2. Gold Mining Finance
Mergers and acquisitions in the gold mining sector totalled a record $17bn in 2006. Global gold mining output, meantime, fell to a 10-year low.

This was no coincidence. Digging for gold on the stock market – rather than exploring for new gold mining reserves – does nothing to increase the world's output. And as 2009 begins, gold mining projects are now struggling to raise new funds due to the financial crisis anyway.

Take-overs and mergers risk going begging in 2009 for want of finance. Russian gold-mining specialist Peter Hambro recently delayed its switch from London's AIM market to the main London Stock Exchange. Many miners are also choosing to mothball existing mines and delay new drilling in 2009.

"Big projects that have already been discovered and that were going into production are now being shut down," says Graham Birch, manager of the $8bn BlackRock Gold & General Fund. "Majors have the deposits and they are not using them. Why do they need to explore for new ones?"

#3. The Easy Gold's Gone in 2009
Formerly the world's No.1 gold mining nation, South Africa saw gold output drop by 15% last year thanks to a combination of energy shortages, labor disputes (mostly over the industry's horrific safety record) and the cold, hard fact that South Africa's gold reserves are being mined out.

Supply has now fallen down by more than three-quarters from the all-time peak of 1,000 tonnes mined in 1970 (then almost 80% of total world output!). South Africa's failing gold supplies put the problems facing all gold miners in 2009 into sharp focus. Just to try and stand still, gold mining companies are having to dig down to record depths – up to three kilometers and more below ground at Mponeng, East Rand, South Deep and Driefontein.

A similar slowdown in gold mining output has also hit the mature fields of the United States, Canada and Australia. As in recent years, gold mining growth in 2009 will come from younger, less politically stable regions such as Central Asia and Latin America, as well as newly "capitalist" China – now the world's No.1 by default, as South African output sinks.

#4. Gold Mining Costs
Input costs are expected to fall sharply for the gold mining industry in 2009. But then, they do start at record-high levels.

Now Nick Hatch, a gold mining analyst at ING Bank, thinks production costs will fall 10% or more in 2009 as the drop in oil and steel prices reaches the pit-head. Freeport-McMoRan Copper & Gold reckons its net cash costs will drop by 25%.

But one high-cost input for the gold mining sector looks unlikely to get any cheaper in 2009, however. "We've had a real shortage of skilled labor," notes Judith Mosely, head of mining finance at Societe Generale. "On the management side as well, it's been spread very, very thinly.

"And of course a lot of the projects are in somewhat challenging countries where it's not necessarily that easy to attract management."

During the multi-year commodities boom, mining and energy firms fought to bid up the wages of expert workers. Now gold mining projects in 2009 face the same shortage of skills – a "missing generation" of geologists and mining engineers, in fact – that's hitting the entire minerals complex.