And that theme looks like it is set to continue with news this week of yet another gold mine  looking to pull-back production.

Canadian Kinross Gold Corporation (TSE:K)(NYSE: KGC) plans to suspend operations at its La Coipa gold and silver mine in northern Chile in the second half of 2013, and has announced a “partial suspension,” to its workforce reports local newspaper El Nortero (in Spanish).

And it would seem that it wasn’t a planned announcement:

According to unionized employees at Compañía Minera Mantos de Oro, Kinross’s subsidiary in Chile, the firm had announced the closure would happen later this year, but last week’s meeting surprised quite a few. Now workers are calling for a general assembly to be held Tuesday and Wednesday this week, where they’ll decide what to do about Kinross notification.

And the reason for the closure? A lack of ‘investment’:

Miners interviewed by El Nortero said Kinross’s subsidiary did not invest enough in La Coipa, nor did it plan the current phase with the workers’ interests in mind.

Look for the this trend to continue for the rest of the year and for gold production numbers to disappoint all year long.

Yet another gold mine plans to shutter in 2013

The wave of rationalisation that is starting to emerge among the major diversified miners will soon spread to the gold sector, as soaring costs and labour shortages begin to squeeze margins…

…Mr Holland criticised fellow gold producers for failing to include corporate and capital costs when publicising their profit margins, saying they were only fooling themselves and governments, who would duly seek to tap the industry for more taxes.

Mr Holland said rising energy, labour and production costs would virtually double costs in the next five years, and a gold price of close to $US2000 per ounce would be needed to keep pace.

If costs remain close to $US1600 where they have been in recent weeks, much of the industry would be “killed”.

And then in mid December we started to get confirmation that the warnings of Nick Holland were starting to come to fruition: From Bloomberg:

Gold mine investors are losing patience with the management teams in the $60 billion (R520bn) industry as their shares head for the first back-to-back annual slump since 1998, even as the metal completes a dozen years of gains.

Producers from Canada’s Barrick Gold to Newmont Mining of the US are failing to control expenses.

The average cost to extract an ounce of gold by the largest mining firms jumped 23 percent to $584.70 last year, Bloomberg data show. In contrast, silver production costs fell 12 percent to the lowest since 2007.

Money managers, including billionaire investor George Soros, have reacted by boosting stakes in physical gold, pushing gold mine executives to resign, or shifting into silver.

Direct holdings of the metal reached a record 2 629.3 tons on Monday, valued at $145bn, after more than tripling in five years, data show.

“Investors are very critical, voting with their feet and pushing management teams to resign,” said John Wong, a portfolio manager at CQS Group’s New City Investment Managers. “You can tell from the way investors sold Barrick down that they are on short fuses.”

Barrick’s board replaced former chief executive Aaron Regent with chief financial officer Jamie Sokalsky on June 6, saying it was “disappointed” in the share performance after costs rose and production dropped. Since then the stock has lost another 19 percent as the company missed earnings for a fourth consecutive quarter.

At least five more gold chief executives have lost their jobs this year.

We concluded that article back in December by writing:

So what happens to an industry when costs start making production unprofitable? Players drop out of that industry and go and find something that is making money – this is all part of healthy market trying to allocate resources efficiently.

We are probably not far off starting to hear about gold mines being shuttered and new mining projects indefinitely parked which will limit the already tight supply of new gold that comes onto the market each year.

And this is exactly what we’re now starting to see happen. From the Telegraph:

Gold miners have responded to recent falls in the price by concentrating on the highest quality deposits, scrapping extraction of more marginal material. This will cause a “significant decline” in global production of gold, according to Angelos Damaskos, who runs the Junior Gold fund.

“A shift in gold market dynamics in the near future could result in a supply crunch,” he said.

“Investors have recently been disappointed by the gold miners’ inability to control costs. With miners’ profitability naturally at risk if there is a decline in the gold price, the sector has experienced a sell-off.

“The response of management is to prioritise cost-control. An effective and immediate way of reducing costs is called ‘high-grading’; essentially all mining teams are now focusing on the highest-grade, most profitable operations at the expense of production volume.”

As a result, marginal deposits are being scrapped from miners’ business plans and unprofitable operations are being shut down, Mr Damaskos said. “This strategy will increase miners’ profits and also inevitably cause a significant decline in global production.”

So we could be starting to see a ‘perfect storm’ brewing in the gold market where central banks around the world are printing like crazy and gold mines are starting to shutter less profitable mines reducing the amount of ‘new’ gold this is coming onto the market. All VERY supportive of much higher gold prices.

“Should economic events take a disappointing turn, causing a flight back to gold, demand levels could exceed supply, creating a global supply crunch,” he said.

“This scenario is a recipe for the gold price to reach highs, potentially of as much as $2,000.“

It should also be noted that if there is a centrally coordinated plan to manipulate the gold price lower this is exactly what we’d expect to see start to happen.

When you keep any price below its market rate you will get shortages of the thing that is being kept artificially ‘cheap’.

Keep a close eye on this trend for the rest of the year because it is probably going to be the main story for gold in 2013.

Is there a ‘perfect storm’ brewing in gold where central banks print like crazy and the gold supply dramatically drops?

Barrick Gold Corp., the world’s largest producer of the metal, posted an unexpected fourth- quarter loss after taking a $3 billion writedown on a Zambian copper mine it bought in 2011.

And the reason for the write-down?

Barrick is the latest major mining company to take multibillion impairment charges as it grapples with rising production costs.

We’ve talked about this before but the longer the gold price is held down the more and more we’re going to see margins squeezed.

Back in August last year we wrote:

Nick Holland, head of South African mine Gold Fields Ltd, has come out and said that soaring costs and shortages in labour mean that miners margins are going to be squeezed unless the gold price rises fast. From the article:

‘The wave of rationalisation that is starting to emerge among the major diversified miners will soon spread to the gold sector, as soaring costs and labour shortages begin to squeeze margins…’

‘…Mr Holland criticised fellow gold producers for failing to include corporate and capital costs when publicising their profit margins, saying they were only fooling themselves and governments, who would duly seek to tap the industry for more taxes.’

‘Mr Holland said rising energy, labour and production costs would virtually double costs in the next five years, and a gold price of close to $US2000 per ounce would be needed to keep pace.’

‘If costs remain close to $US1600 where they have been in recent weeks, much of the industry would be “killed”.’

And that is exactly what is starting to happen according to Bloomberg:

The gold producer said it now won’t proceed with an expansion at the Lumwana copper mine, acquired as part of its C$7.3 billion ($7.3 billion) takeover of Equinox Minerals Ltd., Barrick’s second-largest acquisition.

Mines are beginning to shutter.

And it isn’t just Barrick:

Other miners reporting charges include Kinross Gold Corp., Canada’s third-largest gold miner, which said yesterday it took a $3.09 billion writedown on its Tasiast mine in Mauritania. Kinross acquired the project when it bought Red Back Mining Inc. for about C$8 billion in 2010.

Rio Tinto Group, the world’s second-biggest miner, today reported its first full-year loss in at least 21 years after taking a $14 billion charge on the value of its coal and aluminum businesses.

Running these mines, whether it is gold or copper or any other hard assets is getting more and more expansive cutting into margins.

Which all goes to help explain why the HUI (gold-bugs index of mining shares) has under-performed the metal itself in the past few years.

HUI: 

(click for sharper image)

Gold miners make bigger than expected write-downs on rising costs

Gold prospectors may one day use Petri dishes to help with their quests. A species of bacterium forms nanoscale gold nuggets to help it to grow in toxic solutions of the precious metal, reports a paper published online today in Nature Chemical Biology1.

The molecule with which the bacteria create the particles could one day be used to collect gold from mine waste, says Frank Reith, an environmental microbiologist at the University of Adelaide in Australia, who works on gold-processing bacteria but was not involved in the latest study.

A microbe-assisted gold rush might yet happen, says Reith. Delftibactin could be used to produce gold-nanoparticle catalysts for many chemical reactions, or to precipitate gold from waste water produced at mines. “The idea could be to use a bacterium or metabolite to seed these waste-drop piles, leave them standing for years, and see if bigger particles form,” says Reith.

Magarvey takes those applications seriously: he has secured intellectual-property rights for delftibactin. But he emphasizes that he is most interested in understanding the metabolite’s chemical properties. “I wish I could say we’re up here in Canada growing kilos of gold everyday.”

It would appear that what is really being discussed is a very useful way for gold miners to extract every last ounce of gold out of the very machine intensive process of mining gold. Increasing the productivity and lessening the environmental impact of gold miners seems like a very worthwhile cause.

But what it’s not really suggesting is that people are going to growing gold nuggets like the size found in Australia recently in a make shift lab at home, at least not anytime soon.

But it does raise a very interesting point – what would happen to gold if such a process was invented? It would take away one of golds most important attributes – namely that it is rare.

The inability to reproduce gold easily is one of the main reasons it has such perceived value and has been the commodity of choice when it comes to what to use as money. If only the same can be said for paper or digital money where it can be infinitely increased at zero cost.

So if that were to happen would people choose gold to be money? The answer is almost assuredly no, or at the very least its value would dramatically decrease.

People would simply switch to using another (much rarer) commodity, whatever that may be at the time.

Gold is great at being money, that’s what it does chiefly because of its rarity. If that rarity would cease to be then people would be forced to look elsewhere for what to use as money.

However we’re quite confident you wont have to worry for the next few decades at least, it would seem that the uniqueness in gold’s rareness will continue – unlike its ‘printed in to oblivion’ competitor digital/paper currencies. After-all have not the alchemists throughout history been trying to produce gold in a lab, only for them to be thwarted each and every-time.

Modern day alchemy: Gold prospectors to grow gold in a petri dish?

The Melbourne-based miner also revealed the final price to expand the Lihir mine in Papua New Guinea and its Cadia Valley site in New South Wales will weigh in at $3.45 billion – some $240 million over budget.

There are those rising mining costs again – this will have to start to see it’s way into the price soon otherwise we’ll have to see supply curtailed.

Delivering the company’s December-quarter production figures yesterday, chief executive Greg Robinson said the financial year had started slower than he would have liked.

But he maintained the miner was still able to meet its gold production target, although output would be at the low-end of the group’s forecast for 2.3 million ounces to 2.5 million ounces.

Interesting that guidance was at the lower end, this is because in the six months to December Newcrest managed to produce ‘only’ 953,331 ounces – leaving Newcrest some production increases to make up for this drop.

Newcrest, Australia’s biggest gold miner, produced 953,331 ounces in the six months to December, meaning it will need a boost to meet its target.

Newcrest also announced problems with mining production at another mine.

Newcrest also revealed problems with its Hidden Valley mine in PNG, downgrading its production forecasts from 120,000 ounces to 90,000 ounces.

This might be an interesting trend to keep an eye on in 2013 – will the gold miners get the amounts of gold out of the ground that they say they can (and for the price the expect).

A world of infinite money printing will falling supplies of mined gold could make for a very explosive mix in the coming months.

Newcrest on target to meet production targets after a miss over the past 6 months

ABC news in Australia reports:

China is continuing its trend of buying up Australian gold assets, purchasing St Barbara’s Southern Cross mine in the WA goldfields.

It follows the sale of several other WA mines to Chinese companies over the past six months.

St Barbara halted operations at the mine in the December quarter, which analysts believe was because the mine was running at a loss.

It says the sale to Hanking Gold Mining is worth $22.5 million.

Business commentator, Tim Treadgold says he would not be surprised if China continues to buy up.

“I think you can now see between five and six Australian gold assets either in Australia or owned by Australian companies overseas being transferred to Chinese interests,” he said.

“It’s all part of a plan within China to boost it’s gold exposure either directly through purchasing metal on the market or by investing in gold mining companies.”

This say more about the Chinese view of gold than their outright purchases of physical gold – they clearly don’t just want the metal itself but the means of production as well.

And as we’ve said time and again this should be remembered by anyone who is frustrated with that action in gold lately.

On the buy side you’re joined by the second largest economy on the planet who have a long term plan to vastly increase their gold reserves. In short, you are in very good (and rich) company.

China’s appetite for gold marches on they snap up another gold mine in Australia

The wave of rationalisation that is starting to emerge among the major diversified miners will soon spread to the gold sector, as soaring costs and labour shortages begin to squeeze margins…

…Mr Holland criticised fellow gold producers for failing to include corporate and capital costs when publicising their profit margins, saying they were only fooling themselves and governments, who would duly seek to tap the industry for more taxes.

Mr Holland said rising energy, labour and production costs would virtually double costs in the next five years, and a gold price of close to $US2000 per ounce would be needed to keep pace.

If costs remain close to $US1600 where they have been in recent weeks, much of the industry would be “killed”.

Well now it would appear that those warnings above by Holland have finally reached the investors of those gold mining companies. From Bloomberg:

Gold mine investors are losing patience with the management teams in the $60 billion (R520bn) industry as their shares head for the first back-to-back annual slump since 1998, even as the metal completes a dozen years of gains.

Producers from Canada’s Barrick Gold to Newmont Mining of the US are failing to control expenses.

The average cost to extract an ounce of gold by the largest mining firms jumped 23 percent to $584.70 last year, Bloomberg data show. In contrast, silver production costs fell 12 percent to the lowest since 2007.

Money managers, including billionaire investor George Soros, have reacted by boosting stakes in physical gold, pushing gold mine executives to resign, or shifting into silver.

Direct holdings of the metal reached a record 2 629.3 tons on Monday, valued at $145bn, after more than tripling in five years, data show.

“Investors are very critical, voting with their feet and pushing management teams to resign,” said John Wong, a portfolio manager at CQS Group’s New City Investment Managers. “You can tell from the way investors sold Barrick down that they are on short fuses.”

Barrick’s board replaced former chief executive Aaron Regent with chief financial officer Jamie Sokalsky on June 6, saying it was “disappointed” in the share performance after costs rose and production dropped. Since then the stock has lost another 19 percent as the company missed earnings for a fourth consecutive quarter.

At least five more gold chief executives have lost their jobs this year.

If we take a look at the HUI ‘gold bugs’ index we can see just why shareholders are becoming irate. Since the start of 2011 gold has risen about  25% whereas the gold miners have fallen around 22%.

HUI: 

(click for sharper image)

 So what happens to an industry when costs start making production unprofitable? Players drop out of that industry and go and find something that is making money – this is all part of healthy market trying to allocate resources efficiently.

We are probably not far off starting to hear about gold mines being shuttered and new mining projects indefinitely parked which will limit the already tight supply of new gold that comes onto the market each year.

Gold miners under pressure as investors start to vent anger at rising costs and diminishing profits

Now Scotgold have just announced that they’ve raised some £800k in a share offering to proceed with the project. From The Scotsman:

Scotgold Resources has raised around £475,000 through a share placing and agreed a £320,000 loan extension to develop plans for its Cononish gold mine near Tyndrum.

The firm said it had placed just over 15.3 million new shares at 3.1p each, and they will be admitted to trading on the Alternative Investment Market on Friday…

…The company had already secured £1.18m in funding from RMB Resources, the mining finance arm of South African bank FirstRand, and today it said that loan facility is set to be increased by £320,000, subject to final credit approval.

Executive chairman John Bentley said: “This fundraising is an important step towards the commercialisation of our project at Cononish. We now have funds in place in order to complete our preparatory work and look forward to completing the development study early next year.”

However it would appear that the company still has some fund raising to go:

Scotgold, which is also listed in Australia, is seeking about £25m in financing for the Cononish mine, which could generate up to £65m in pre-tax cashflow over its ten-year lifetime.

Site of the gold mine:

Scotgold raises £800k for UK gold mine

From Reuters:

KHARTOUM, Nov 27 (Reuters) – Sudan expects to produce around 50 tonnes of gold this year, earning $2.5 billion, its mining minister said, as the country seeks to offset the loss of most oil reserves when South Sudan became independent last year.

Around 2800 tonnes are currently mined globally each year – so the 50 tonnes out of Sudan in 2012 will represent nearly 2% of all the gold mined in the world annually, a significant amount.

The article continues:

…Output of 50 tonnes could potentially make it Africa’s third largest gold miner behind South Africa and Ghana, and push it into the top 15 producers globally.

The sudanese government have allowed 85 companies to search for gold at more that 120 locations. Clearly the Sudanese see gold exploration as a vital way forward for their economy.

Those 50 tonnes will bring into the Sudanese economy around $2.5bn – Before South Sudan broke away oil was generating around $5bn per-year for the economy, now that number is expected to be around 75% lower or $1.25bn, making gold their most important export by some margin.

To put the targeted 50 tonnes in 2012 into perspective, for all of 2011 around 34 tonnes of gold were exported by Sudan – that’s an expected increase in gold exports of nearly 50% in 2012.

It also means that the USA et-al’s renewed military interest in Sudan of late (including multiple drone strikes) seems to be following a pattern of targeting countries rich in gold reserves (Lybia has/had 143 tonnes).

And let’s not forget that 13th biggest gold reserves in the world are in Iran – nearly as much as ECB’s reserves and some 60% more than the UK.

Sudan discovers there’s more money in gold than oil – set to produce nearly 50% more gold in 2012 than in 2011

This relates to a story we wrote about back at the start of August when Nick Holland, the head of Gold Fields Ltd, said:

The wave of rationalisation that is starting to emerge among the major diversified miners will soon spread to the gold sector, as soaring costs and labour shortages begin to squeeze margins…\

…Mr Holland criticised fellow gold producers for failing to include corporate and capital costs when publicising their profit margins, saying they were only fooling themselves and governments, who would duly seek to tap the industry for more taxes.

Mr Holland said rising energy, labour and production costs would virtually double costs in the next five years, and a gold price of close to $US2000 per ounce would be needed to keep pace.

If costs remain close to $US1600 where they have been in recent weeks, much of the industry would be “killed”.

That last line has turned out to be very prescient. A few day’s ago Barrick were out with their Q3 earnings and they disappointed, largely due to higher than expected costs of mining:

Total cash costs for gold are anticipated to be $575-$585 per ounce, compared to the previous guidance of $550-$575 per ounce, primarily as a result of higher cash costs from Australia Pacific and ABG. Net cash costs are expected to be $480-$500 per ounce, within the previous guidance of $460-$500 per ounce.

Reuters reports mining analyst John Ing commenting on the earrings from Barrick:

“That, together with disappointing earnings reflecting a narrowing of margins, really deflated enthusiasm for the world’s so-called leader among the gold miners,” Ing said.

Or in other words the cost of getting gold out of the ground has been more expensive than thought – a situation that can only really be rectified by a higher gold price or less supply.

As a result Barrick has now lost some 25% in share value this year, whilst Goldcorp’s share price has risen some 3.5% this year. Reuters reports the two companies market-cap as:

Goldcorp’s market cap was C$35.32 billion (US$35.47 billion) at the close on Tuesday, while Barrick’s market cap stood at C$35.30 billion. Newmont Mining Corp, the world’s second largest gold producer, is worth US$23.84 billion.

But what is quite odd, and again reflects the importance of the ‘out-of-the-ground’ costs is the difference that the two companies expect to mine this year:

Goldcorp lags Barrick in output. Toronto-based Barrick expects to produce some 7.3 million to 7.5 million ounces of gold this year, while Vancouver-based Goldcorp plans to produce some 2.35 million to 2.45 million ounces this year.

So Barrick expects to dig out of the ground some 200% more gold than Goldcorp and yet Goldcorp is now the larger company.

So even after gold’s huge run up it would appear that, at least for some mining companies, the price hasn’t run up nearly enough to keep pace with rising costs.

Goldcorp now biggest gold miner in the world by market cap