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New report shows challenging outlook for gold industry

Long-term forecast of Australia’s mineral production and revenue

The outlook for gold: 2017-2057

Report by MinEx Consulting: October 2017

Under the combined support and sponsorship of six government agencies (both State and Federal), three research organisations and three industry groups1 , a landmark report has been published2 by MinEx Consulting looking at the forty-year outlook for the Australian gold industry.

It forecasts the likely number of mines, production, revenues and employment out to 2057 for this vital sector of Australia’s economy. In the past, most industry studies rarely look beyond ten years.

The report’s author, Richard Schodde, says that “there are two good reasons for this; Firstly; the future is highly uncertain – and any single-line forecast is almost certain to be wrong. Secondly; most of these studies only looked at existing mines and possible new projects.

This is fine for short- to medium-term forecasts but it ignores the important contribution of new discoveries for mine production in the longer-term.”

It goes without saying that every mine has a finite life (and will eventually close down); it also equally true that all mines were once a gleam in the eye of a geologist (i.e. it took someone to find them). Leaving out the discovery story results in an incomplete view on the long-term future of the mining industry.

As discussed below, nurturing exploration success is critical for ensuring the long-term sustainability of the mining industry.

MinEx Consulting’s approach to the task was via the following eight-step process:

1. Embracing uncertainty and using a Monte Carlo approach to assess 1000 different possible scenarios of the future. This included generating a series of commodity price cycles that reflect what the industry has experienced in the past.

2. Estimating future production from existing mines, adjusted for changes in the gold price, variability in operating performance and possible mine-life extensions.

3. Assessing whether the future gold price scenario is sufficiently high enough to trigger the development of new mines on known projects.

4. Using the price scenarios to predict likely future exploration expenditures. And from this,

5. Estimating the likely number, size and quality of discoveries made over time.

6. Determining the likelihood that a given discovery will be developed and, if so, incorporating a timedelay between discovery and development.

7. Developing a model to estimate the likely production rate and mine life for these discoveries. From this, estimating their likely timing and contribution to future revenues and employment.

8. Integrating together the results for existing mines, new projects and exploration success.

The study assumes that there is a 90% chance that over the next forty years the gold price will lie between $793 and $2258 per ounce, with an average price of $1524 (in constant 2017 A$). Today’s price is ~A$1650/oz.

In forty years-time only four of the current 71 mines will still be operating – with most closing down over the next two decades. This includes iconic mines like the Kalgoorlie Super Pit and Telfer.

MinEx forecasts that, by 2057, the remaining mines will produce less than 0.4 Moz pa of gold. In the medium term (i.e. 5-10 years out) an increasing amount of production will be supplied from new mines based on known deposits. However, it won’t be enough to offset the decline from existing mines. By 2057, output from new projects will only total 0.3 Moz pa. Many of these new projects are only economic under high gold price scenarios.

In the long term (i.e. 10-40 years out) exploration success will play a major role in overcoming much of the looming shortfall in gold production. The model forecasts that, over the longer term around $677 million pa will be spent on gold exploration in Australia (slightly up on current levels), resulting in 266 new gold deposits being found over the next forty years. Half of these will be developed, and will contribute 4.06 Moz pa of gold in 2057. This is equal to 87% of the combined total production of 4.69 Moz pa in that year.

Consequently, in forty years-time almost all of Australia’s future gold production with come from exploration successes. It is significant to note that the model predicts that in 15 years-time (i.e. by 2032) half of Australia’s gold production will come from mines that are yet to be discovered.

However, of serious concern is the fact that the weighted average delay between discovery and development for a new discovery is 13 years. There are also indications that it is getting harder and slower to convert a discovery into a mine. Consequently, government and industry need to support exploration today.

We only have the next couple of years to properly identify and address ways to improve our exploration performance – otherwise Australia runs the real risk of a significant supply disruption in the medium-term. Figure 2 shows that over the next forty years, gold production and revenues are set to drop by half – to 4.69 Moz and A$7.3 billion respectively. The number of operating mines is set to fall by a third (from 71 to 47) and total employment by 70% (from 27,980 to 8.300 workers). Half of the fall in employment is associated with productivity gains associated with automation. Sensitivity studies indicate that each additional dollar spent on exploration generates an extra $11.40 in revenue.

MinEx estimates that for the Australian gold industry to maintain production at current levels in the longer term, it will either need to double the amount spent on exploration or double its discovery performance (i.e. reduce unit discovery costs from $70/oz to $35/oz).

The incremental benefits of reaching this target will be an extra 4.05 Moz of annual production, an extra $6.23 billion in revenues and additional 7160 jobs. The above-mentioned outlook is premised on “business-as-usual”. The opportunity exists for industry and government to take the initiative to invent its own future.

In addition to developing policies that encourage/stimulate exploration, the opportunity also exists to be more efficient and effective at making discoveries. The challenge is that many of these initiatives require effort (and money) and will take several years to bear fruit. Given the long lead times involved (both for R&D, discovery and mine development) there is an urgent need to start the process now.

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