Why global Gold mining output is dwindling?

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Why global Gold mining output is dwindling

Gold mining output from China, the new world No.1, is already falling. It may end completely by 2014.

Isn't it always the way? The latest rush into Buying Gold for investment has hit just as the world's gold mining supply is struggling to keep up with demand.

According to World Gold Council, global gold mining production has actually declined since 2000, despite the huge run-up in Gold prices.

Annual gold-mining output topped at 2,573 metric tons in 2000, falling to 2,518 metric tons in 2005, then 2469 metric tons in 2006 and finally 2,444 metric tons in 2007 according to the GFMS consultancy – a London-based research group that serves gold mining companies and supplies the World Gold Council with its data.

Now China leads the world in gold mining output, having upped its production in 2007 by 12% over 2006, producing 9.7 million ounces or 276 metric tons, according to GFMS.

But gold production in China is actually down from the 2005 figures; it's just that South Africa, the old No.1 producer, has seen its production fall even faster.

South Africa produced just 296 tons of gold last year, down from 1,000 tons in 1970.

Gold Mining Output: What's going on?

The surge and fallback in gold production is governed by a steady stream of mine closings and expansions. Work sites get mined out before new ones can make up the difference.

This often happens when Gold Prices are too low to warrant a lot of new exploration, which probably contributed to the slowdown in exploration spending in the late-1990s. That slowdown may now be playing out today in lower production rates, given the long lead time for new mines to come on market.

But won't the current high Gold Bullion prices boost the levels of supply coming out of the mines? Not necessarily...at least not in the short term.

The run-up in Gold Prices last year – up from $600 to above $900 per ounce – did improve the economics of mining. With prices high, gold mining companies have enough room in the budget to buy hi-tech exploration equipment and/or take risks on developing new fields. But the impact on production is not always immediate.

"There are two possible ways to approach [gold mining] projects, either to maximize profits at the present time, when the price is high, by electing to mine high grade ore, or electing to mine lower grade (metal) which is economical now," says GFMS's senior analyst William Tankard.

In other words, you can mine the expensive, hard-to-get-at gold while Gold Market prices are high and save the cheap/easy stuff for later. That can create an unusual effect, as focusing on the expensive, lower-grade ore today leads to lower production in the short term.

The advantage for mining operations, Tankard says, is that by going after the hard stuff first, you could "see the potential life of the mine extended by electing to mine sub-economic grade for sale at lower prices. By electing to do that now while it is economical, you save the best for last, extending the life of the asset."

Gold Mining Output: Outlook for 2008-2014

So what is the outlook for global gold-mining supplies, particularly in China, now the global leader in production?

Not so good in the short run, says the Zijin Mining Group. It currently owns the largest gold mine in China, and it quotes GFMS in asserting that China's existing mines will run out of ore in six years.

Without new discoveries, China will simply deplete all its deposits by 2014 says Ren Guangzhi, Zijin's manager of investment.

The analysts at Metals Economics Group in New York, however, give China a little longer – some 14 years of gold production if continued at 2005 levels, and assuming a 10% recovery loss.

Of course, if Gold Prices stay high, new exploration will eventually lead to greater supplies. But it's not immediately clear when or if we'll start to see this impact.