The gold industry must invest about $US37bn ($54bn) on greenfield (new) projects and mine restarts over the next five years to maintain production at current levels, Wood Mackenzie reports.

‘Peak gold’ was becoming a real possibility prior to the COVID-19 outbreak.

That ‘peak gold’ summit is now in sight as COVID-19 sparks a raft of paused/ downsized/cancelled exploration programs – the lifeblood of the gold mining sector.

Global exploration budgets for nonferrous metals (everything not iron ore) had already declined 3 per cent to $US9.8bn in 2019 from $US10.1bn the previous year.

(Except in Australia, where mineral exploration rose in every quarter of 2019.)

Data gatherer S&P Global Market Intelligence says this was due to the challenging prices for many commodities throughout the year, along with merger and acquisition activity in the gold sector that impacted on exploration priorities.

To avoid a perpetual decline in gold supply, the industry must see a rise in project development.

But that’s not happening. As organic growth (through exploration) wanes, miners are looking to buy gold through mergers and acquisitions which, so far, has failed to significantly increase production.

Wood Mackenzie estimates the industry will need to commission 8 million ounces per annum of projects by 2025 to maintain 2019 levels of production.

That’s about 44 new or mothballed mines, Wood Mackenzie says.

“Based on the average project capital intensity of $US4,610 ounces per annum, Wood Mackenzie estimates the industry must invest approximately $US37bn on greenfield projects and restarts over the next five years,” it says.

If all of Wood Macs probable projects come online before 2025, this would almost meet the requirement to maintain 2019 production levels.

It’s more likely however, “that we see some degree of slippage among a number of these assets due to permitting delays, prioritisation of other capital projects and changes in scope,” Rory Townsend, Wood Mackenzie head of gold research, said.

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Which gold projects will be most sought-after?

Wood Mackenzie has identified around 260 projects that gold miners and investors could turn to.

Given the size of the resource that is available to be developed, talk of peak gold supply may seem a little surprising, says Townsend.

“Crucially, however, it is not the lack of gold that is the constraint.

“Gold miners and investors are carefully searching for the deposit that is ‘just right’ in order to allocate capital.”

And some jurisdictions are better than others, Townsend says.

“Social and governance considerations are dissuading the exploration of certain jurisdictions and the progression of identified deposits,” he says.

“Investment and exploration in countries such as South Africa has all but dried up, with the gold mining industry plagued by power outages, labour strikes and regulatory uncertainty.

“This has prompted investors and miners to consider countries they deem to be more mining friendly.”

Ghana has been a significant beneficiary of this, overtaking South Africa to become the largest gold producer in Africa in 2018.

With capital hard to come by in a post-COVID-19 world, advanced explorers or miners with tier 1 projects wishing to benefit from elevated gold prices may have to consider joint ventures and phased approaches to commission these larger deposits “or risk missing the window of opportunity”, Townsend says.

“If miners do not capitalise on gold’s heightened allure through this bull cycle, Wood Mackenzie says these projects will either continue to trudge toward production for years to come or be rescoped,” he says.

Meanwhile, smaller projects from the smaller explorers and producers are proving an exciting proposition.

“They have the advantage of a lower initial capital outlay and can be typically brought online with speed and efficiency, particularly open pit deposits and mines that have previously been in operation,” Townsend says.

“The drawback to these projects, however, is the fact that they will struggle to nudge the needle for a material gold producer.”

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