Experts say Nevada will dodge gold ‘production cliff’

If there’s gold in them thar hills, nobody’s finding it.

That’s the word from the equities research division of a big Canadian bank, which predicts a “production cliff” after 2017 for major miners of the precious metal. National Bank Financial said in a new report that big gold companies have found too few large deposits worldwide to sustain current production rates.

What’s more, ore bodies in the pipeline are going to be more expensive to develop and take longer to get into production, the report said. Nor is there enough production capacity to accommodate the glut of projects awaiting permitting today.

It’s a report with important findings for Nevada, which was the world’s third-largest gold producer in 2011 after China and Australia. The $8.8 billion in gold and silver proceeds reaped in Nevada in 2011 rivaled the $10.7 billion gaming brought in the same year.

For a state so reliant on gold, National Bank Financial’s report looks troubling, at least on its surface. The analysis said gold miners such as Barrick Gold Corp. and Newmont Mining Corp. will settle for lower worldwide production after 2017. That’s not great news for a state where 20 percent of job growth since 2009 has come from mining.

But two factors could help Nevada amid a global gold-mining crunch. For one thing, miners here seem to be bucking the trend away from new deposits. More importantly, an international production slowdown could prop up gold prices, which would make additional exploration and output more feasible in the long run.

Start with those slumping discoveries. Investments in exploration have skyrocketed in recent years, going from roughly $1 billion in 2002 to nearly $5 billion in 2008, and more than $8 billion in 2011, National Bank Financial said.

The spending itself isn’t an issue: It’s natural for exploration to jump when prices rise, and the price of gold per ounce went from $310 in 2002 to nearly $1,700 at the end of 2012.

The problem is, for the billions they’ve spent looking for ore bodies, miners haven’t found much. They reported 11 major discoveries worldwide in the 1990s, when exploration peaked at $3 billion in one year, but only five so far in the 2000s.

Yet, industry observers in Nevada said the state will dodge the global production cliff.

Yes, it’s harder to find reserves today, said Tim Crowley, president of the Nevada Mining Association, but it is possible.

“There are fewer and fewer of those ‘Eureka’ kinds of places,” he says. “But as we put money into the ground and explore, we’re still finding minerals, though not necessarily in the huge concentrations of some of the past big finds.”

John Dobra, an associate professor of natural resource economics at the University of Nevada, Reno, and director of the university’s Natural Resource Industry Institute, said he doesn’t think the production cliff is applicable in Nevada, at least not by 2017.

“Production has been falling in the last several years, even in Nevada, but Nevada is a place where we’ve had some new discoveries that are pretty substantial,” he said

Just in the last year, Newmont officials said the Long Canyon project the company bought from Fronteer Gold in 2011 near Wells could have triple or quadruple its estimated 2.6 million ounces of gold. And Barrick reported in its quarterly earnings report on Feb. 14 that it has doubled the estimated resource at its Goldrush exploration project near Elko from around 7 million ounces in fall 2012 to 14.1 million ounces today. Barrick also noted that there’s potential for an additional trend east of Goldrush, and the site’s resource “continues to grow.”

As with theories about peak oil, conjecture that gold’s about to run out has been around a while, Dobra said, noting that he saw similar reports in trade journals a decade ago.

Yet, Nevada’s gold mines have consistently maintained 10 to 12 years of reserves for the last few decades. Nevada produces about 5.5 million ounces of gold a year, and had 81 million ounces in proven reserves as of 2010, according to the Nevada Division of Minerals. Plus, miners are “barely scratching the surface at this point” in terms of potential finds in areas near existing mines, Dobra said.

Newmont spokesman Omar Jabara agreed that it wouldn’t be the first time someone forecasted steep declines in production. The problem with those projections, he said, is they usually hinge on current industry conditions.

Things change, though. Newmont said in its quarterly report Friday that its global reserves increased in 2012 to record levels for the fifth straight year, reaching nearly 100 million ounces. Converting those resources to marketable gold depends on factors including metal prices and project approvals, and as those factors evolve, projects could actually come to fruition.

“As we get closer to 2017, some of those options will look much more viable, while new options will emerge that we don’t have in our sights today,” Jabara said.

Still, gold is a global market. So production declines elsewhere will affect the Silver State. But any major supply contraction “bodes well for higher gold prices, or, at least, solid underpinning,” according to the National Bank Financial report.

And, said Alan Coyner, Nevada Division of Minerals administrator, sustained high prices could lead to improved gold supplies, because they open up marginal or lower-grade ore bodies for development.

Global production declines could also launch a hunt among major gold miners for acquisitions from smaller exploration and development companies. That’s how Newmont grabbed Long Canyon. And it’s also how Barrick ended up with the world’s second-largest gold mine, Northern Nevada’s Cortez, which it acquired in stages between 2006 and 2008 from Placer Dome and Rio Tinto.

Dobra said legions of smaller companies are exploring far-flung prospects across the world, particularly in South America and Africa, so he doesn’t believe the world is in much danger of hitting a serious “production cliff.”

Regardless of what happens around the world, big gold producers likely will stay focused on Nevada in coming years. Barrick called the state “a core operating region” and “the cornerstone of our success” in its fourth-quarter report. It also said it would allocate half of its $400-million exploration budget here in 2013.

And Newmont, which got about 40 percent of its 5 million ounces of 2012 production from Nevada, said in October that Long Canyon had “district-scale” exploration potential, which means it could be a significant trend. In its Friday report, the company also noted that its operations in North America, mostly in Nevada, held the biggest share of its gold reserves, at 38 percent. Australia was a distant second, at 30 percent.

Contact reporter Jennifer Robison at
jrobison@reviewjournal.com or 702-380-4512.
Follow @J_Robison1 on Twitter.