Barrick
shuts hedge book as world gold supply runs out By By
Ambrose Evans-Pritchard, International Business Editor Published:
7:20PM GMT 11 Nov 2009
Global
gold production is in terminal decline despite record prices
and Herculean efforts by mining companies to discover fresh
sources of ore in remote spots, according to the world's top
producer Barrick Gold.
Aaron
Regent, president of the Canadian gold giant, said that global
output has been falling by roughly 1m ounces a year since
the start of the decade. Total mine supply has dropped by
10pc as ore quality erodes, implying that the roaring bull
market of the last eight years may have further to run.
"There is a strong case to be made that
we are already at 'peak gold'," he told The Daily Telegraph
at the RBC's annual gold conference in London.
"Production peaked around 2000 and it
has been in decline ever since, and we forecast that decline
to continue. It is increasingly difficult to find ore,"
he said.
Ore grades have fallen from around 12 grams
per tonne in 1950 to nearer 3 grams in the US, Canada, and
Australia. South Africa's output has halved since peaking
in 1970.
The supply crunch has helped push gold to
an all-time high, reaching $1,118 an ounce at one stage yesterday.
The key driver over recent days has been the move by India's
central bank to soak up half of the gold being sold by the
International Monetary Fund. It is the latest sign that the
rising powers of Asia and the commodity bloc are growing wary
of Western paper money and debt.
China has quietly doubled holdings to 1,054
tonnes and is thought to be adding gradually on price dips,
creating a market floor. Gold remains a tiny fraction of its
$2.3 trillion in foreign reserves.
Gold exchange-traded funds (ETFs) – dubbed
the "People's Central Bank" – have accumulated 1,778
tonnes, making them the fifth biggest holder after the US,
Germany, France, and Italy.
Ross Norman, director of theBullionDesk.com,
said exploration budgets had tripled since the start of the
decade with stubbornly disappointing results so far.
Output fell a further 14pc in South Africa
last year as companies were forced to dig ever deeper - at
greater cost - to replace depleted reserves, not helped by
"social uplift" rules and power cuts. Harmony Gold
said yesterday that it may close two more mines over coming
months due to poor ore grades.
Mr Norman said the "false mine of central
banks" had been the only new source of gold supply this
decade as they auction off reserves, but they are switching
sides to become net buyers.
Barrick is moving fast to wind down the remaining
3m ounces of its infamous hedge book over the next twelve
months, an implicit bet on rising gold prices over time.
Mr Regent said the company had waited too
long to ditch the policy, which has made the company enemy
number one among 'gold bug' enthusiasts. The hedges oblige
Barrick to deliver part of its gold into futures contracts
set long ago at levels far below today's spot prices.
The strategy worked well in the falling market
of the 1990s, but has cost the company dear in lost profits
this decade. "Hindsight is always 20/20," said Mr
Regent, who was appointed from the outside earlier this year.
Barrick bit the bullet in the third quarter,
taking a $5.7bn charge against earnings on hedge contracts.
Liberation is at last in sight. In 2001 the hedge book topped
20m ounces.
Mr Regent said the hedge policy has weighed
badly on the share price and irked investors, becoming a bone
of contention at every meeting. The financial crisis brought
matters to a head as markets fretted about counterparty risk.
"It was clear to me that there were a significant number
of institutions who wouldn't invest in Barrick because of
the hedge book," he said.
Barrick produced 1.9m ounces of gold last
quarter, down from 1.95m a year earlier. Costs have been "trending
down" to $456 an ounce, though rising energy prices pose
a fresh threat. Total reserves are 139m ounces, far ahead
of rival Newmont Mining at 86m.
The hedge book venture has not been a happy
one, but those who predicted that Barrick would eventually
"blow up" on its contracts may owe the company an
apology.