Contents

Introduction

World gold mine production is on the decline. Output fell 1.5% in 2016 to 3,168 tonnes (102 million ounces), the first drop since 2008, according to preliminary figures from GFMS. Latin America contributed to this drop despite a handful of new gold mine startups, with reduced production at major operations including Yanacocha and Lagunas Norte in Peru, Veladero and Cerro Negro in Argentina, and Peñasquito in Mexico. Asia and North America also reported reduced gold mine production in 2016.

For the most part, the drop is a natural consequence of reduced investment. Mining companies large and small shut off the capital spending tap around 2013 in a frantic effort to protect margins as the price of gold plummeted. Exploration budgets withered, while maintenance and development projects were deferred as operators turned their focus to cost reduction and so-called capital discipline. Gold production continued to rise for a few years due mainly to the startup of projects committed prior to the turnaround in prices, but most in the industry could see that continued production growth was not sustainable given the lack of investment. An additional consequence has been a decline in gold reserves, which in aggregate have fallen about 25% over the past five years, Goldcorp CEO David Garofalo noted in a recent presentation.

"There are relatively few new projects and expansions expected to begin producing this year, and those in the near term pipeline are generally fairly modest in scale, hence our view that global mine supply is set to continue a multi-year downtrend in 2017," GFMS analysts wrote in January.

Mulatos mine in Mexico. CREDIT: Alamos Gold

Latin America's five biggest gold miners are set to report an aggregate production decline at their operations in the region of 8%, or more than 500,000oz, in 2017, driven by planned lower grades at Goldcorp's Peñasquito and at Pueblo Viejo, a 60:40 JV between Barrick Gold and Goldcorp. The latter company's regional production profile in 2017 is also reduced by the 2016 sale of the Los Filos and Cerro Blanco mines in Mexico and Guatemala, respectively. However, Barrick expects its Latin America production to rise in 2017 despite the reduced guidance at Pueblo Viejo, as this will be offset by an increase at Veladero. Yamana Gold and Fresnillo are also forecasting lower Latin America output in 2017, while AngloGold Ashanti is planning a slight increase.

But the market scenario has changed and gold miners have come a long way from the depths of 2013, which was characterized by sinking prices, project deferrals and massive impairments. Gold prices are looking firmer, though not much higher. Many operations and projects have been optimized and companies have also made a big push to deleverage, as excessive debt was an important factor holding them down in terms of being able to invest or acquire.

The million-dollar question, then: is it time yet for a return to growth? Many companies have positioned themselves for this moment and indeed some have already begun make investment decisions that indicate confidence. However, the breadth of the turnaround in the near term will depend on heavily on how the price of gold reacts to uncertain economic and geopolitical tides.

Figure: Latin America's Biggest Gold Producers: Output and Guidance
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