March 26, 2017

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A surge in gold prices to boost East African mining sector after months of low commodity prices

 

Gold and silver are the best performing Commodity Assets of 2016. The First half of 2016 (H1) saw gains of 26 % and 38% the two metals respectively, year to date.  Gold is currently trading at $1,338 dollars an ounce. The two precious metals were the best performing metals prior to Brexit Vote and they continued to the top performers since Brexit.

Gold , making a remarkable recovery from its December 2015 Six years Lows when Gold  Futures dropped to $1,050 Losing over 40% since its peak of $1,921 an ounce in September, 2016. This, after the Federal Reserve’s raised rate for the first time in ten years.  This is because US dollar and Gold are mostly inversely correlated. The yellow metal, also known as the Bullion, is increasingly valued as a Financial Reserve Asset and Investors mostly use Gold as a Safe haven and a Hedge against Risk in time of Market Turmoil, Volatility and in Low yield Environment.

Gold is also one of the least Volatile Assets. The Bullion like many other commodities that are denominated in US dollar, dollar strength makes it more expensive for investors of other currencies to buy. This subsequently pushes down on Gold demand.  Additionally, a strong and relatively stable global Economic growth leaves investors with less appeal for safe haven Assets as they seek higher yields and more productivity in Bonds and equities.

There are two main reasons for the Surge in Gold Prices this year.  The first is to do with the Financial Markets. The Plunge in Global equities and worries about China’s Economy in the beginning on year buoyed Gold’s safe heaven appeal.  Further to this a hold back in raising interest rates by the federal reserve striking a dovish tone  and sighting Market Uncertainties and Risks from outside the U.S Economy,  also exacerbated by the British Vote to Leave the UK.

The second reason is tied to The Demand and Supply Curve. Over the Last decade Gold Mine Output had surged 24% to a reach a record of $3,155 tones in 2015. This as companies dug more to exploit a 12 year Bullish Cycle; this according to Data Industry Researcher GFMs a Unit of Thomas Reuters. About 65% of the bullion that’s mined or recycled is used in Jewelry or Industrial Application the rest is sold is to Investors.  But when Prices dropped to about $1,100 as it was the case for 2015, Production began to plunge.

This is because the Industry needs an average of $1,200 to break even when all cost is considered, according to James Sutton JP Morgan Chase. Gold Production has declined by the 3% this year putting an end to a seven year rising output from Existing mines. It is estimated that Gold Out will decline by 18% by the End of the Decade.

Especially Given the fact the four years of falling gold prices prior to 2016 significantly reduced Capital Expenditure for Exploration. A Decline in Gold Exploration has lead to a significant Decline in the Major gold discoveries of both Brownfield and Greenfield exploration in the Last two decades for major Gold Deposits (2.5 Moz Au) and the amount of Gold contained in these Deposits. Raising concerns for the need to step up new Discoveries to replace the Depleting reserves from mature Mines.

In 2015 a 10% Slump in Gold Prices led to the Decline in Gold Equities for Gold producers globally. In Tanzania, Africa’s 4th Largest Gold Producer after South, Ghana and Mali Gold Low gold prices hurt Revenues and Gold Earnings for producers. Acacia Mining (Barrick Gold), also world’s largest Gold Producer reported a 30 percent profit drop. Tanzania’s Mining Industry in the same year also cut 1,685 (16%) of mining industry’s formal work force. With 1,050 of those job cuts coming directly from Acacia Mining as Gold Revenue for the Government Dropped from $1.65 billion in 2013 to $ 1.31 billion 2014.

A 26% Surge in Gold price in 2016 has led to a rise in Gold Producers Stock, sheltering Canadian stocks from the worst of the rout in Global markets as investors rush to precious metals for safety especially after Britain’s shock Vote to leave the European Union, the Gains in GOLD Producers off set slumps across the major industries in the S&P/TSX.  The S&P Gold Index soared as much as 8.4 percent and 5.8 percent respectively on June 24 (Day after the BREXIT Vote), the highest Level since April 2013.  Canadian equities remain the top – performing stocks of the Developed market.

Barrick Gold (parent company to Acacia Mining), also world’s Largest Gold Producer has gained the most among Gold producers jumping 5.6 %  in June while  Gold Corp Inc. increased by 4.7%. 2016 also been the best year for world’s Largest Gold Exchange traded funds (ETFS) with a rise of $18 billion dollars year to date rise in assets under management. Highest since physically backed fund’s Inception in 2004.

To put into Context as to why these Developments in the Gold Industry are critically important to the East African Mining Sector; Rising Gold Price, shirking Supply pool  from Existing Mine and Inadequate Capacity to Bring on Stream New Discoveries is likely spur a Wave of Gold Exploration Investments.

2015 was a record year for Gold supply at 3,155 tones, but production is expected to decline by 3% this year, putting an end to seven years of rising Output. Gold Production is expected to Decline by 18 percent by the End of the decade. Lower mined gold supply is expected to put an upward pressure on prices, driven as well by the safe haven Asset demand. HSBC Predicts that Gold will rise by 19% by 2017 Year End, partly as Supply Tightens.

This is because the Momentum for Gold Exploration and Discovery has been on the decline over the Last two Decades both in the number of Green field and Brownfield Gold Deposit Discovered and the amount of Gold contained in these Deposits. As such future success of the Gold Industry will be achieved in a “context of increasing cost, increasing yearly replacement of reserves and increasing the Minimum size of New Deposits that really impacts the Bottom-line for Large Mining Companies (LFMCs)”. This is because the Future Success of Large Mining Companies is Directly Dependant on Successful Mineral Exploration.

A Surge in Gold Equities/ Stocks and Exchange Traded Funds (ETFs) means is more Capital Expenditure (CAPEX) Available to bring back production and Exploration from HALTED projects during the Slump as well as Invest in NEW GOLD EXPLORATION PROJECTS.

East Africa Boast Significant Gold Resource and this could be a Good Opportunity for the Mining Sector to Position as a Destination for Gold Exploration. The region should execute a good strategy for attracting a Good share of the Available Gold Exploration Investment Capital.  Capital that has been lacking since the 40% Gold price slump after September 2011 peak when Gold Prices had reached $1,921 dollars an ounce leading up to the 2016 Gold Prices Rebound.

The Recovery in Gold Price has already positively impacted Kenya’s Mining Industry, for Example. Two major Investments in Gold have been made. The First by UK based GOLD PLAT that has this year acquired Kenya’s First Commercial lease to Export Gold and announced the Construction of Kenya’s First Gold Processing Plant in Trans- Mara District to Process Gold from its Kilimapesa Mine in Western Kenya.  Gold Plat early this year also secured a $250, 000 (Kes. 25,000,000) from Local Bank to Construct the Plant. Gold Plat expects to export 5,000 ounces of Gold in the First year. Kenya has the Capacity to produce up to 12 tons of gold per year, form its Migori Greenstone Belts that has Estimated 1.2 Million ounces of Gold.

The Second investment has been made by Acacia Mining PLC (Barrick GOLD). Acacia has recently acquired two gold blocks in ndiri and Siaya, western Kenya from Lonmin for $5,000,000 (five million dollars). This has moved to Consolidate Acacia’s Gold Exploration in Kenya to add to its  already Existing Exploration Assets portfolio in  three Blocks it involved in Joint Venture partnership in Babura, Sigalagala and Rosterman Western Kenya. This is an Endorsement that Kenya’s mining sector is a very Strong Prospect for Gold Exploration.

Tanzania and Uganda as well as could be great Beneficiaries of Gold Exploration Capital Investments. Tanzania, ALREADY 4TH Largest Gold Producer in Africa has an Estimated 130 Million ounces of Gold (130 Moz) of which only about 4% of reserves is currently Exploited. Uganda as well has an estimated 5 Million Ounces in Kamalenge – Kyasampawo Districts.

According to World Gold Council, China is the Leading Gold Producer accounting for around 15% of the World Production. Central and South America Supply about 17% in total, North America Accounts for 15 percent, 14% comes from  CIS Region of the former Soviet Union, whereas Africa produces about 20% of the World’s Gold. About a third of the total Supply of Gold is recycled.

Tina Nduta is the Founder of Eimara Africa Resources. A Nairobi based Mining & Energy Consultant. She is also Co- Founder of Kerende Gold Exploration Limited.

Email: tina.nduta@eimaraafrica.com

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