* Gold mine production set to reach record this year
* Slide in prices unlikely to cut output until 2015
* Weak demand likely to offset any prospect of supply cut
By Jan Harvey and Clara Ferreira-Marques
LONDON, Nov 20 Output from the world's gold
mines is set to hit record highs this year, disappointing bulls
who are impatiently waiting for production cuts following this
year's 24 percent plunge in prices.
Some gold miners have felt the squeeze of lower prices this
year, and a number, including Canada's Kinross and
Russia's Polymetal, suspended marginal mines and
projects after a dramatic first-half price drop.
But as prices fall, others are actually increasing output to
maintain revenue and profit levels. In some cases, they are
targeting higher grade ore to keep marginal mines operating and
generating cash, at the expense of future production.
Furthermore, several large projects put into motion during
gold's 12-year rally, which took it as high as $1,920 an ounce
in 2011, are coming to fruition.
"Our expectation is that we're going to see a fresh record
high in gold mining output this year," GFMS analyst William
"What we're seeing is an ongoing response not to the slide
in prices, but the decade-long stretch of fairly heavy capital
investment into the mining industry that preceded it."
The world's top three gold miners - Barrick Gold,
Newmont Mining and AngloGold Ashanti - all
reported higher production in the most recent quarter.
For some marginal mines, firms are planning to tap better
grades up front, a practice known as high-grading, which often
comes at the expense of shortening the life of a project and
giving up lower grade ore that could have been economic later.
African Barrick Gold, for example, re-engineered
its lowest grade and highest cost mine, Buzwagi, to tap higher
grades and move less material, hoping to ensure the operation
"In the short term, when they have got flexibility, you can
see companies changing the ore mix to keep themselves
operating," Nomura analyst Tyler Broda said.
"It costs money to shut things down."
COSTS EDGE DOWN
During the boom years, the cost of gold mining soared. But
this year the average cost of producing an ounce of gold is
already showing signs of retreating, according to metals
consultancy Thomson Reuters GFMS.
All-in costs are expected to ease back to around $1,200 an
ounce in 2013 from $1,228 last year, after total cash costs fell
to $769 an ounce in the second quarter from $796 in the first
three months of the year.
That is still perilously close to the spot gold price of
$1,270, and there is only so far miners can cut back to keep
tough operations afloat. But, analysts say, the long delays and
time scales in mining mean it will take time for the drop in
prices to translate into lower mine output.
For now, miners are cranking up volumes to boost revenue and
spread out their hefty fixed costs over a bigger base - just as
large new projects such as Randgold's Kibali mine in the
Democratic Republic of Congo and Barrick Gold's Pueblo Viejo in
the Dominican Republic come onstream.
Metals consultancy Metals Focus says it expects gold mine
output to break through 3,000 tonnes a year in 2014 for the
first time. That compares with an estimated 2013 output of 2,920
tonnes and 2012's 2,861 tonnes, according to GFMS.
Gold production could start moderating in 2015.
"That's the point when you will start to see some
cost-cutting closures," Metals Focus analyst Oliver Heathman
said. "Depending on the mines, they can sustain a period of high
grading. The bulk of mines are still profitable on a cash cost
basis at $1,000 an ounce, but not on a prolonged basis."
The impact that increases and decreases of a few hundred
tonnes will have on gold prices is unclear, however.
Gold's large above-ground stocks and heavy recycling mean
primary supply has less impact on prices than on those of other
commodities such as platinum or copper.
"Could we see another 500 tonnes coming out of mining before
it starts to act as a meaningful floor to the price? I would say
that we could," GFMS's Tankard said. "We saw production at
around 2,400 tonnes a year as recently as 2008. It's certainly
feasible to get back to those levels."
So far, a sizeable drop in the other main section of supply,
recycling - down 158.1 tonnes in the first nine months of this
year - has done little to support prices. That drop has been
heavily outweighed by expectations that demand will stay weak.
The World Gold Council said earlier this month that gold
consumption this year could fall by 5-10 percent, potentially
taking it to a four-year low, as investors liquidate bullion
holdings and the pace of central bank buying slows.
For gold, which is primarily valued as an investment
vehicle, the importance of output for price is as much about
perception as reality.
If demand starts to recover, investors could be tempted back
to gold if they think falling mine supply can play a part in
"If you produce 10 percent less gold next year, it won't
make a lot of difference," Mitsui Precious Metals analyst David
Jollie said. "But the message it sends to investors is that the
price cannot sustainably stay at low levels over an extended
period of time."
"We all know how that game pans out."