THE COMPETITIVE LANDSCAPE FOR GOLD DORÉ

Philip Newman, Director, Metals Focus

Doré is the intermediate product produced by most of the world’s primary gold mines, typically a gold-silver alloy containing less than 5% of impurities. Globally, the environment for sourcing mined doré has become increasingly competitive in recent years, as both gold recycling volumes have declined and global refining capacity has continued to expand. The toughness of this market is not unsurprising, when you consider that global refining capacity is around two and a half times greater than annual mine supply. In this article we look at the current trends in global gold mine production, the breakdown of available doré supply globally, and our view on the outlook for the market in the coming years.

Global gold mine supply rose by 2.4% in 2014, to 3,133t. However, due to declines in recycling, consolidated supply from the two sectors was in fact flat year-on-year, at around 4,300t, and some 6% lower than its 2012 peak. Within this, gold mine production reached another all-time high as output continued to benefit from the commissioning and ramp-up of projects green lighted during the last bull market. On a country level, the growth in mine supply in recent years has largely been driven by the continued rise of mine supply in China and Russia. However, it has also been aided by an increasing number of greenfield developments in emerging gold producing nations, such as Kibali in the Democratic Republic of the Congo and Oyu Tolgoi in Monogolia, to name two prominent examples from last year. As a result, we have continued to see the growing geographic diversification of gold mine supply, and the lessening dominance of the established gold producing countries, such as the US and South Africa. The latter, which is estimated to have produced a third of all the gold ever mined, has now seen its contribution to global mine supply fall  to around 5%. In contrast, at its peak in the late-1960s, the country was responsible for producing some two-thirds of annual mine supply.

Looking at the current breakdown of global gold mine supply, what emerges is that only a far smaller volume is potentially “on offer” to international refineries. Out of the +3,100t of annual mine production, approximately 10% is recovered to base metal concentrate, predominantly as a by-product of copper mining. Not lost, this metal is recovered as part of the copper refining process, during the electrochemical production of copper cathode, with the gold, as well as other precious metals, left within the anode slime residue. Similarly, 5% is recovered to concentrate at primary gold and silver mines. This is typically treated in specialist processing facilities. Although still ending up largely in doré form, 15% of global mined output is derived from small scale, informal sources as mainly alluvial gold.

Consequently, this leaves around 70% of global gold production remaining, or 2,200t of formal sector global doré production. However, not all of this is available in the international market to gold refiners. A number of countries, or provinces within these markets, have legislation restricting the export of unprocessed doré, while others have historically been nations where doré is in large part refined domestically, due to long standing agreements or because the local mining companies themselves jointly own the incumbent refinery, as is the case in South Africa. In broad terms, these situations can be regarded as broadly captive to domestic refiners.

The breakdown of global gold production

Looking at the main “captive markets”, these are shaded in grey on the accompanying world map. The largest of these is China, which is also the world's largest gold producing nation. The country produced 462t of gold mine production in 2014, some 15% of the global total. However, a fifth of this is a by-product of base metal mining. Including imports, Chinese companies processed some 130t of gold from base metal concentrates last year. Elsewhere, it is a legal requirement that gold produced in Ontario, Canada’s largest gold producing province, is refined locally. Although not strictly captive markets, gold doré produced in Australia and Russia (ranked second and third respectively in the global production table last year) is in the most part refined domestically, a result of the long established gold refineries in these countries.

Captive doré markets in 2014

On the other side of the market, global refining capacity is dominated by Switzerland. The country has no domestic mine production, while Europe as a whole is a relatively minor producer. However, gold's high value to weight ratio means that logistically, gold-rich doré can be shipped large distances for processing at a relatively modest cost. For example, the realisation cost for doré (which includes transport and refining charges) is usually well below 2% of a mine’s total cost. In comparison, the same cost at concentrate producing copper-gold mines is typically a lot higher, and often accounts for around one-third of a mine’s total cash cost. Elsewhere, significant doré refining capacity tends to be located in or near major gold procuring regions, such as South Africa, Western Australia, Russia, the Middle East and North America. With the major exception of Brazil, South America has relatively limited installed capacity. Instead, doré produced in the region is in the most part shipped to North America or Europe for processing.

If this did not pose enough challenges, the global doré market is expected to become more competitive over the next few years. Firstly, following a number of years of growing global doré supply, production is expected to enter a period of secular decline in the next couple of years, as the project pipeline is depleted (and not replaced), while low gold prices also force the closure of some high cost operations. Secondly, global refining capacity has continued to expand, with significant new plants and expansions being commissioned, for example, in India and in the Middle East. Meanwhile, a number of smaller gold producing nations are pushing to develop local refining capacity. For example, Kaloti Precious Metals recently opened a 60t/yr facility in South America, in partnership with the Suriname government, while the Ghanian government is currently firming up plans to establish a 100t/yr operation in Africa’s second largest gold producer. Furthermore, Kaloti is building a new facility in Dubai, which will lift its capacity in the region from 300t, to 1,400t per annum.  

By Metals Focus, leading independent precious metals consultancy; www.metalsfocus.com

Disclaimer: Views are personal and not the views of the publisher.