gold investing

How Much Gold is Gone? Quantifying COVID-19 Mine Closures

Apr. 22, 2020 05:00PM PST

How are coronavirus prevention measures affecting gold production and exploration this year? Three experts share their thoughts.

Gold companies the world over have been impacted by the coronavirus, with disease prevention measures leading to mine closures and slowdowns across the globe.  

But how many gold mines has COVID-19 taken offline? And what could the impact on global gold production and exploration be in 2020? To find out, the Investing News Network (INN) reached out to a number of market watchers to learn their thoughts.

Read on to find out what’s known so far about how the virus is impacting gold mining and exploration, and what indicators are important to keep an eye on moving forward.

Gold production losses from COVID-19 tough to quantify

Pinpointing how many gold companies have slowed or halted production is not an easy task. All of the experts INN spoke with agreed that the number has stayed in flux as countries and regions around the world adjust their COVID-19 prevention measures, and as companies themselves hone their reactions.

Speaking on April 7, Kirill Kirilenko, precious metals analyst at CRU Group, said his firm was estimating that about 10 to 15 percent of gold mines globally were offline.

“These primarily include mines in South Africa, Peru, Mexico and some parts of Canada,” he said.

Adam Webb, head of mine supply at Metals Focus, said that as of April 9, his firm counted 109 operating gold mines either offline or operating at reduced capacity due to the coronavirus.

“Countries such as Peru and Mexico have implemented country-wide policies impacting all mines operating in country, whereas in Canada and Brazil policies vary across state/province,” he explained.

As an example, Canadian provinces Ontario and Quebec both ordered non-essential businesses to close on March 24, but Ontario designated mining as essential while Quebec did not. The move forced closures and slowdowns at a variety of major mining operations in Quebec before the province changed course several weeks later and gave mining essential status.

Webb added that most Chinese operations are back online, having seen peak disruption levels in January and February. Metals Focus estimates that the Asian nation saw a year-on-year gold production slump of 27 percent in Q1 due to coronavirus prevention initiatives.

For his part, Federico Gay, senior mining analyst at Refinitiv, described the number of affected gold mines as “still somewhat low,” noting that 42 mines in total were impacted as of April 8. That includes 32 in temporary suspension or care and maintenance, plus an additional 10 that at the time were ramping down or operating at reduced status.

“This numbers seems low, considering we monitor over 950 gold mines, but we have to consider that there are copper and silver mines, which also produce gold, that are also impacted,” he added. When those mines are added in, the impacted number jumps to 82.

Gay also said South Africa, Peru, Canada and Mexico have seen the most impact at a country level. He added, “China, gold’s top producer, was highly impacted as well, especially within the artisan and small-scale mining, but due to lacking official records it will take some time to estimate the real impact.”

Miners’ Q2 reports to bring more clarity on output impact

Coronavirus restrictions first prompted gold-mining companies to curtail operations or close them down entirely in about mid-March, but initially many were reluctant to quantify what these decisions would mean for their production.

Since then, some large miners, including Agnico Eagle Mines (TSX:AEM,NYSE:AEM), Kinross Gold (TSX:K,NYSE:KGC) and Newmont (TSX:NGT,NYSE:NEM), and have withdrawn their guidance for the year; most, however, have not issued new numbers.

“Considering the situation is changing on daily basis, it is extremely difficult to estimate the impact on gold output, and every forecast is likely to be updated frequently,” said Gay.

Webb made a similar comment, saying, “Companies will need lockdown periods to come to an end before they can quantify the impact as there is a lot of uncertainty around this at the moment.”

Kirilenko, Gay and Webb all said that they don’t think gold companies’ Q1 results will give a clear picture of how COVID-19 has impacted their production. Instead, they believe Q2 reports will offer illumination.

“Most shutdowns were announced at the end of March, so the impact on output may not be reflected in the stats released by the miners for Q1, but should definitely be seen in July, after they publish reports for the second quarter,” said Kirilenko. He added that market watchers will then also have a clearer sense of the impact on how hard global gold production levels have been hit.

Gay offered an early idea of COVID-19’s impact on worldwide gold production for the year, saying that preliminary forecasting from Refinitiv, whose data is sourced from its recently revamped Mining Production Database, shows that gold output will be impacted by about 1 percent, which equates to a potential loss of around 1 million ounces. For context, he said that over the last five years, year-on-year production increases have averaged about 2.5 percent.

Gold exploration still a question mark

COVID-19’s impact on gold production is far from certain, but what seems even less clear is how a slowdown in gold exploration could impact the space in the future. Alongside miners slowed or shut mines, some gold juniors have reduced or cut programs, or taken other preventive measures.

“Difficult to quantify this,” said Webb when asked how much of the world’s gold exploration has been halted or slowed by the virus. “Although there will certainly have been a slowdown due to lockdown policies and also a lack of funding due to the financial turmoil caused by the crisis.”

Indeed, funding was a key concern brought up by both PDAC President Felix Lee and EY Canada’s Jeff Swinoga in a recent interview with INN.

In response to the same question, Gay said that at least for now gold projects have been “minimally impacted,” though again he pointed out that it’s also important to consider operations that produce gold as a co-product or a by-product.

“On the copper front, one of the most relevant events was the suspension of contractors’ contracts for the Los Pelambres expansion project in Chile (also an important gold producer),” he said. Gay added that a more accurate picture will begin to emerge when companies discuss their growth CAPEX.

In the long term, Gay expects to see a decrease in annual gold production — although the coronavirus is not the only reason for that. He noted that big gold miners have long neglected exploration investment, with growth CAPEX among the 15 largest gold miners declining about 20 percent from 2014 to 2019. The drop was largely because of investor pressure for higher company returns in the short term.

Refinitiv anticipates that year-on-year gold production will start dropping from 2023 — if that happens it would be the first output decrease since 2006.

“If current gold prices maintain similar levels on a medium to long term, more reserves and resources might become available (most of the companies consider a gold price of US$1,200 per ounce when estimating their reserves), therefore acting as ‘buffer’ for this production drop, but it might not be enough to keep growing annual production.”

Overall, the message was to wait and see — it’s still too soon to know for sure how gold production will be impacted this year, and for gold exploration the answers may be even further out.

Don’t forget to follow us @INN_Resource for real-time updates!

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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