Gold: What's Motivating Higher Production Levels Among Miners

Welcome to another week. Today I’ll take you through the news that’s motivating higher production levels amongst gold miners, and news that’s causing some to restrict production levels. We’ll see politics being influenced and why the UK investor should be worried.

Throughout the last few weeks we’re hearing more and more gold mining companies crank up production levels. They’re getting more gold to the market to capitalise on the high gold prices. Like a gymnast on steroids they’re working harder to bring mines into production.

This week as we sat down with a coffee and ran through the gold news we stumbled upon the unusual story that Scotland is hiding gold, and apparently not just a wee amount. Scotgold, the Australian-funded mining company, have found deposits of gold around Tyndrum, a small Scottish village. They’ve also announced they are going to ask for planning permission to start mining approximately 4.5 million tonnes of gold at their Canonish mine, again in Scotland. This mine was drilled twenty years ago and it’s never been commercially worked... until now.

And Scotgold isn’t the only one. The key is higher profit margins which makes some mines worth producing. RioZim, Zimbabwe’s largest listed resource corporation, is planning to increase gold production to 80kg from the current 60kg a month at its Renco mine. A week ago Gold Fields announced they aim to produce 1m ounces from South America by 2015. All across the board we’re seeing mining companies motivated by the current surge in gold prices… well not quite all, but we’ll come to that later.

It’s not just the miners

The gold price has shaped companies that rely on it and this doesn’t just include miners. This week Franco-Nevada (FNNVF.PK), the mining royalty company said it experienced record gold royalty revenue for the third quarter. Orica Ltd., the world’s largest industrial explosives maker, said profit would climb for a ninth year on sustained demand from mining companies.

SMT Scharf AG technology and world market leader for rail-bound railway systems for the mining sector recorded revenue growth in China and South Africa in particular. In August 2009, the company received an order from China for five monorail hanging railway trains to be supplied on short notice. This order has a value of more than EUR 2 million. The added money injection by governments and the rising gold price has benefitted many companies directly and indirectly related to gold mining.

The Gold Fever grips politics

The strength of the gold price has led to political maneuvering. We see changes in government policies as a direct result of a high bullion value.

Last week Caledonia Mining's Blanket gold mine, in Zimbabwe, was awarded the title of 'exporter of the year' in the mining category, for the Matabeleland region.

“This award re-confirms Blanket’s status as a significant participant in the Zimbabwean mining industry,” the company said.

Caledonia restarted the operations at Blanket in April, after being granted a gold dealers licence from the Ministry of Finance and a gold exporters license from the Reserve Bank of Zimbabwe, under the country's new gold dealing and export policy.

Under the new policy, gold producers can market and sell their gold directly and are also allowed to keep the payment for their gold in foreign exchange.

Elsewhere on Wednesday Vietnam’s central bank announced they will allow imports of gold. Gold imports have been banned since May last year.

These changes indicate Governments willingness to utilise the high gold prices.

The Dollar and the pound – two spent swimmers.

But where the price of gold goes up it’s usually in the face of other currencies going down, as we mentioned in our dollar gold relationship article a few weeks back. And this week the UK government has been making its own announcements…

Whilst the price of gold was hitting new highs the dollar index hit a 15 month low on Wednesday, trading at 74.77. Misery was later compounded for British pound holders as Mervyn King, the Governor of the Bank of England, said on Wednesday that a weaker pound against the US dollar should support the U.K. for a recovery. It’s not clever to stand under a falling stone but what choice have we?

David Riley the head of sovereign ratings at Fitch Ratings, said that the UK’s sovereign credit rating is the most at risk, out of all the advanced economies, of losing its AAA status. Citing government debt and its need to add more stimulus as likely causes he continued "Our stable rating outlook reflected our expectation that the UK Government will articulate a stronger fiscal consolidation programme next year."

So in other words it’s time to cancel the next holiday.

Calls that the pound is going to get weaker are not new. Jim Rogers, amongst others, has mentioned this on a number of occasions. With a weaker pound the UK investor is more likely to seek value in bullion.

Appreciating the RAND

South African miners are the exception to the high gold price equals higher production levels rule. The RAND has dramatically appreciated over the last year...

The appreciating RAND has brought problems to companies based in South Aftrica. Despite the rise of the gold price South African miners are having their profit margins squeezed as the RAND appreciates. A higher RAND means higher wages, higher transport costs and higher fuel costs. These all have consequences...

Graham Briggs, the Chief Executive of Harmony Gold, the South African miner, announced…

"There will be closures, probably a couple of closures in the next six months or so."

When you factor in the South African state run utility company, Eskom’s, proposal to triple power tariffs, an appreciating currency doesn’t seem so enviable.

As the gold price continues to hit new highs watch out for all related statistics on our website... and hold your breath till next week.

Disclosure: none

Comments

[lucky lenny:]

Of course more gold is being mined & sought after. The question is whether the new supply is going to satisfy the demand? or whether demand continues to outstrip supply & gold goes to $2k? or $5k/oz?

Nov 15 11:25 PM

[William Leg...:]

Captain Obvious here. The phrase for the day is "demand versus supply versus price". Cheers.

Nov 16 03:44 PM

[Mad Hedge F...:]

xco Paul Tudor Jones nicely summed up the fundamental argument in favor of gold. The yellow metal is accumulated, and not consumed, and is the ultimate store of value. Gold does particularly well during times of excessive monetization, inflation, and instability of the banking system, as we are seeing now. Central banks, which have been consistent sellers for the last 20 years, are about to flip to net buyers. If non G7 central banks, like China, want to increase their gold holdings from the current 20% of reserves to the 35% weighting now owned by the G7, it will require 1.3 billion ounces of new purchases, or 20% of the total world supply. Certainly they are getting fed up with their ever depreciating dollar holdings. Witness last week’s Bank of India purchase of 200 metric tonnes. ETF’s now own $50 billion worth of the barbaric relic, about 3% of the world total, making them the sixth largest holder in the world, and retail demand for these gold proxies is expected to explode in coming years. Private investors, mutual funds, and pension funds are all underweight gold. This is all happening in the face of declining production from traditional gold suppliers like South Africa. It all adds up to a whole lot of new gold buyers and a shrinking body of sellers. Paul didn’t give any specific price targets other than “up.” Long time readers of this letter know I have been banging the table about gold all year. Time to salt away more American eagles for those college funds and grandkids.

Nov 16 05:31 PM

[Laurence Hunt:]

As a Canadian, it crosses my mind that the US will soon be "a low cost producer" of gold. So the US economy may not be great, but I'd say the mining business should thrive in a country with a devaluing currency such as the US.

Nov 17 12:23 AM