Gold near $1,000 no panacea to falling supply

By Eric Onstad - Analysis

LONDON (Reuters) - A jump in the gold price over the magical $1,000 per ounce level would not be enough to bring on a surge of new production due to uncertainty over long-term prices, logistics problems and scarcity of projects.

Global gold production has slipped by six percent since 2001 and analysts say current record prices are not expected to reverse the eroding trend in the next several years.

A buoyant gold price -- which touched an all-time peak of $989.30 an ounce on Monday -- allows firms to exploit lower quality ore, but a dearth of new mine discoveries will mean that any real boost to production would be years away.

"Pick a number, even at $1,200 or $2,000, even at those very high prices, the existing resource bases are getting depleted, that you can't stop," said analyst Leon Esterhuizen with RBC Capital Markets in Johannesburg.

"The high gold price will certainly encourage exploration, the question is when you find the stuff, how long will that take to get into production."

Even when new deposits emerge, they may not be developed for a variety of reasons, including shortages of skilled labor and infrastructure, high capital costs, legal restrictions in emerging market countries and long-term price assumptions.

Before committing to expensive projects that may be producing for decades, mining firms must be sure that the prices used to judge viability will be sustained.

Mining firms rarely make public their long-term price assumptions, but analysts say projects have been delayed as their viability is shattered due to rising capital costs and long-term price estimates of around $500-$600 per ounce.

Canada's Teck Cominco (TCKb.TO) said earlier this month several projects would remain on hold, including the Galore Creek gold and copper project, on which development was halted last November when capital cost estimates more than doubled to C$5 billion ($5.06 billion).

HEDGING NO OPTION

"At current spot prices, pretty much all the projects out there are going to be viable anyway. It's more a question of how long it stays up here rather than how high it goes," said John Reade, head of metals strategy at UBS Investment Bank in London.

"It would have to stay high long enough to persuade the companies that this is sustained."

In the past, miners might lock in current high prices by hedging at least a portion of the future production, but a groundswell of opposition by many investors to hedging has forced major firms to shun the practice.

Investors, bullish on rallying gold prices, argue that firms should be exposed to spot prices and have slammed firms for previous hedging at low levels that has dampened profits.

"Effectively, that is one way that the investor pressure again hedging is preventing companies from growing," Reade said.