Supply from gold mine production grew 3% y-o-y in Q2 – from 811.4t to 835.5t – the highest Q2 on our records. Looking at H1, mine production rose from 1,571.7t to 1,629.5t (4% y-o-y). This strength in mine output is mainly attributable to the continued ramp-up of several projects, as well as further capital expenditure from gold miners (albeit still at a historically low level).
Declines in some major producing nations were outweighed by substantial gains in others. China, the world’s leading producer of gold, environmental reforms introduced in 2017 continued to impact production (-5% y-o-y). Furthermore, in June the Ministry of Ecology and Environment (MEE) launched the largest ever number of compliance inspections. In the US, the completion of mining at Kinross Kettle River-Buckhorn and a planned shutdown for maintenance purposes at the Barrick Nevada roaster, dented production levels (-8% y-o-y). Closures at TauTona and Cooke underground – both loss-making operations – contributed to a 5% y-o-y decline in South African output.1 2
Russian production in Q2 rose 16% y-o-y as growth in the Magadan, Amur and Irkusk regions was supported by the ramp-up of Natalka. In Indonesia, continued mining of higher grades at the country’s biggest mine, Grasberg, saw national output rise 18% y-o-y. The largest y-o-y rise was seen in Canada, where the continued ramp-up of three greenfield projects, Brucejack, Rainy River and Moose River, boosted production by 21%. In Tanzania, recent issues surrounding Acacia Mining have stabilised, leading to green shoots of growth in overall production.3
The outlook for gold production appears optimistic.Several gold miners reported strong levels of Q2 production, with some raising guidance for 2018. And the project pipeline continues to improve, largely due to output growth from junior and mid-tier miners. Q2 saw several projects begin production, helping to support global output levels. Capital expenditure also increased 14% y-o-y during Q2, signalling a further commitment from miners to grow production. However, cost pressures also built up during the quarter due to higher raw material costs such as oil and steel, with the latter affected by trade tariffs. These pressures are not having a substantial impact on supply currently, but could have a greater impact the longer they continue (and the gold price remains subdued).
Net producer hedging
Following 32.2t of net hedging in Q1 2018, gold miners switched to 10t net de-hedging in Q2. The weakness in the Q2 gold price reduced the incentive to hedge production, coupled with existing short-term positions reaching maturity. At the end of Q2 the global hedgebook stood at 248t.
Hedging remains tactical rather than strategic. Since Q1 2014, an equal number of quarters have seen de-hedging as hedging. This reveals the tactical, rather than strategic, nature of hedging by gold miners over recent years. Movements in the gold price – in local currency terms as well as internationally – continue to be a key factor in the hedging decision-making process, as does project-specific financing.
Gold recycling – specifically gold exchanged for cash – grew by 4% in Q2, from 282.9t to 294.7t. Supply from recycling in H1 was marginally higher than H1 2017 (575.3t v. 570.2t).
Turkey and Iran were the primary drivers of gold recycling growth in Q2. Currency weakness in both countries boosted local gold prices, enticing consumers to lock in profits from their holdings. In Iran, recycling was supported by the country’s deteriorating economic situation, compelling some consumers to sell.
Recycling in India, the world’s second largest consumer of gold, was higher y-o-y. This increase is not entirely unexpected as ahead of the important sowing season consumers in rural communities sold gold – as they usually do – to fund farming equipment and seed purchases.Income from the subsequent harvest will be at least partially reinvested in gold. This seasonal uplift is more pronounced than in recent years due to currency weakness boosting local prices, and this has created another incentive for consumers to sell gold.
In western markets, such as the US and Europe, gold recycling remained relatively stable. A combination of depleted near-market stocks, an absence of distress selling and an anaemic local gold price, created unfavourable conditions for gold recycling to flourish.