Last year will mark peak gold production for a few years at least, and copper will dip after 2019, investment research firm Bernstein says.
Coming up, although Bernstein hasn't made its mind up
The firm has looked at the progression of higher margins (higher than miners are experiencing now) to higher capital expenditure, and then higher production.
Investment dropped off in 2012-2013 when many miners’ bottom lines got smashed by lower commodity prices and tougher overall conditions. It’s the drop-off then that will apparently see gold production go down 2.2% annually on average from 2017 to 2020.
But even as the industry’s margins improve they are still way down on the 2011-12 peaks for copper and gold producers. Margins hit US$6,000 per tonne for copper and $1,200 per ounce in 2011.
“In the copper industry, a 1,047% increase in unit EBITDA margins between 2002 and 2011 (peak margins) was required to incentivise an 892% increase in capital expenditure between 2002 and 2013,” the Bernstein report said.
“That 892% increase in capex was sufficient to generate just a 59% increase copper production between 2002 and [estimated production for 2019], equivalent to a 2.6% CAGR.”
This means the production cycle for copper and gold is eight to 10 years from the high margins to the “volume growth” period.
For gold, the numbers are similar: a margin increase of 615% between 2002 and 2012 led to a 19% increase in production between 2002 and 2017.
This leaves the industry with some quick decisions to make, Bernstein said, without enough quality projects to boost supply (barring Kakula-Kamoa perhaps) and the limits of productivity improvements approaching, quality projects will cost more and the money should have been spent yesterday.
Bernstein said production was not going to fall off a cliff in the near-term though this seemed an inevitability, and higher commodity prices would be the only catalyst for the greater margins needed bring on new projects.
“Clearly we do not think that a scenario whereby global production of both copper and gold is declining by a compound rate of 3-4% per annum is a likely real-world scenario,” the report said.
“At least, it’s not a scenario that is by any means compatible with positive global economic growth. Clearly, these industries are under-investing, and this under-investment has been commodity price driven (though of course the “overshoot” of the boom years has also played a part).
“Future projects will be more capital intensive, with longer development and construction timelines, and will require even higher margins to enable their construction than was the case in the 2002-2013 period described above,” the report said.
“The conclusion is clear … prices must rise.”
Copper got a boost in November when US president Donald Trump said he would throw money at infrastructure tax credits, although whether this actually happens is uncertain. Gold has skimmed the $1,200 per ounce level in recent days and will be hit by the likely US Federal Reserve’s rate rise.
Couple US confusion with slowed growth in China, the edge of the cliff looks pretty close.
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