With all signs indicating continued support for gold prices, the view on supply is becoming increasingly important. As we noted in April, the medium- to longer-term outlook predicts falling production; however, production has also been pulling back in the near term despite the gold price continually inching upward. Furthermore, as reported by the World Gold Council earlier in the year, gold has been purchased in record quantities for gold-backed exchange traded funds, and economic uncertainty has added even more interest in gold as a safe haven investment. These factors are expected to sustain strong gold prices over the near term.
Largest production decreases in Asia, but not just due to COVID-19
Gold production typically falls quarter over quarter in the March quarter, and 2020 was no exception. We estimate gold production to have fallen by around 1.3 million ounces from the December 2019 quarter, although it was essentially flat compared with the year-ago March quarter. While restrictions imposed by COVID-19 have certainly been one factor in lowering the quarter's production, they were hardly the only factor. In addition to COVID-19 shutdowns that started to occur in January, Chinese mine production was still being affected by preexisting government mandates to curb production in pursuit of enhanced environmental protection. While China, the world's largest gold producer, initiated its own lockdown early in the quarter, Latin America, Canada and South Africa — also major gold producing regions — suspended operations in March, exacerbating production shortfalls. The lockdowns ex-China, having occurred later in the quarter, will more likely have a greater impact in the June quarter. Meanwhile, Australia, Russia, the U.S. and West Africa mostly maintained business as usual, with many increasing production year over year while navigating how best to mitigate the spread of the virus.
Most jurisdictions experienced only minor changes in first-quarter production. In Latin America, COVID-19-related restrictions kept production just over 50,000 ounces lower year over year, although the continuation of those restrictions into the June quarter will result in a larger impact for the year. While less severe in the March quarter, the outlook is much the same for Canada. Increases in some regions were offset by decreases in others. Increases in the U.S., largely driven by increased gold yield at the Nevada Gold Mines joint venture, were essentially balanced by COVID-19-driven decreases in Latin America. Increases in West Africa, driven by new operations and grade increases at Fekola, were balanced by lower Australian production. COVID-19 was not responsible for Australia's lower production, however; it was due instead to a combination of falling domestic production by Newcrest Mining Ltd., which we discussed in a recent overview of the top producers, and closure of the Raleigh underground mine at the East Kundana joint venture following increased seismic activity.
The most significant decreases were in Asia and the Pacific region. Oyu Tolgoi in Mongolia was down almost 94,000 ounces year over year due to significantly lower gold grades and recovery rates, and significantly lower grades caused a drop of 51,000 ounces year over year at Lihir in Papua New Guinea.
Rising costs driven by increased capex, only partially offset by falling currencies
All-in sustaining costs, or AISC, have increased quarter over quarter in the March quarter in each of the past four years. The weighted-average AISC of US$995 per ounce for 87 producers in the latest March quarter was a 10% increase year over year and an as-recorded high for the past 25 quarters. Later inclusion of late-reporting companies that were not included in this analysis may change the average. The top three producers, Newmont Corp., Barrick Gold Corp. and AngloGold Ashanti Ltd., reported AISC increases of 10%-22%.
For Barrick and Newmont, costs were up year over year at numerous mines; at the largest operation for both companies, the Nevada Gold Mines joint venture, costs were up due to higher sustaining capex requirements. While Newmont's Australian operations benefited from a favorable U.S.-Australian exchange rate, lower production kept the AISC slightly higher. For AngloGold Ashanti, increased capex was also a significant factor in rising costs, notably with an early spend on the redevelopment of Obuasi in Ghana and increased export duties at Geita in Tanzania and Cerro Vanguardia in Argentina; lower production was also a factor.
Others such as Agnico Eagle Mines Ltd., Kirkland Lake Gold Ltd. and Yamana Gold Inc. had even larger year-over year increases in March-quarter AISC at 29%, 37% and 57%, respectively. For Agnico Eagle, increased costs associated with a slower-than-expected ramp-up of its Amaruq satellite — part of its Meadowbank operation in Canada's Nunavut territory — was the biggest driver of rising AISC. Meanwhile, capex requirements in bringing online the Barnat deposit at Canadian Malartic in Quebec pushed AISC higher for both Agnico and its partner Yamana Gold. Yamana's overall rising AISC also came from production shortfalls at Cerro Moro in Argentina, largely due to impacts of COVID-19, increasing per-ounce production costs. For Kirkland Lake, AISC was up due to the inclusion of Detour Lake, which the company acquired in January. Each of these companies also experienced temporary closures of at least some of their operations in March and April. Production is therefore expected to be lower for each company, and with that drop in production, their AISC will likely be higher in the June quarter.
Short-lived downturn in gold equities hurt producers and explorers in Q1
Rising AISC and falling production do not help when companies are facing declining market capitalization. While the gold price moved upward during the quarter, the value of the top 200 gold companies fell by US$50 billion quarter over quarter. From a high of US$344 billion on Dec. 31, 2019, the group's value fell 14% to a 10-quarter low of just under US$295 billion March 31. The declining values in the March quarter may have been a function of the market struggling to maintain liquidity as equities across all sectors suffered during the onset of the pandemic early in the year. Consumer confidence fell amid a stalled Chinese economy, with lockdowns starting in the country and cascading across Europe and the Americas. It is noteworthy, however, that within the month following the end of the March quarter, gold equities had recovered dramatically, with producers adding nearly US$100 billion to their aggregate market cap by the end of April.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.