Gold producers set to halt 6-year expansion in output

London

THE biggest gold bust in three decades is about to end a six-year expansion in mine output.

From Russia to South Africa to North America, the biggest producers saw profits turn to losses as prices plunged, forcing them to cut spending on mines in half over three years.

While bullion output will probably reach a record in 2015, the increase will be the smallest in at least six years, before production drops one per cent in 2016, according to Barclays plc.

Mines supplied 3,114 tonnes last year, an all-time high, valued at about US$127 billion, after companies stepped up investment to capitalise on prices that surged more than fivefold in the decade through 2011.

While the appeal of gold as a financial asset means that supply doesn't usually influence the metal's value as much as economic or monetary policies - partly because every ounce ever mined still exists - demand is growing in China and India, the largest buyers.

"Any contraction in mine supply will tend to tighten the physical market, which feeds through to price," John Meyer, an analyst at London- based brokerage SP Angel Corporate Finance LLP, said last Thursday. "It is also a positive influence in a larger dynamic that influences investor sentiment towards gold."

With gold prices so low, about 10 per cent of global production isn't profitable, based on data from Metals Focus, a London- based industry consultant. The estimate includes the expense of mining and replacing reserves through exploration, as well as other costs. The firm, as well as Morgan Stanley and Natixis SA, predict global gold output will decline.

"The big question is how fast supply will start falling," Nic Brown, an analyst at Natixis, said last Wednesday. "We don't think we are going to see sharp declines until at least 2017."

Barrick Gold Corp, the biggest producer, had a US$2.9 billion net loss last year, the biggest since 2009, on lower prices and writedowns of mines in Chile and Zambia. AngloGold Ashanti Ltd said in February that it will cut output by as much as 10 per cent this year as it spends less and stops mining high-cost deposits. The New York-traded shares of both companies have plunged by more than 70 per cent since the end of 2011.

Capital spending, which covers maintenance and exploration, has fallen about 50 per cent since 2012, according to data from Bloomberg Intelligence that tracked 11 of the largest gold producers.

Ten of the world's major producers posted a combined loss of US$6.9 billion in 2014, compared with a combined profit of US$11.3 billion in 2010, the Bloomberg Intelligence analysis shows. BLOOMBERG