Gold ‘production cliff’ ahead

Peter Koven | Feb 1, 2013 10:05 AM ET |

Analysts Steve Parsons, Paolo Lostritto and Shane Nagle think the reasoning behind the “production cliff” is simple: too few large deposits have been discovered to sustain current production rates. The fact that miners are delaying or canceling projects because of cost pressures and other constraints has accelerated the move towards the “cliff,” they state.

  “We contend that [constrained production] is already reflected in the shares of these companies, not because the issue is well understood, but because investors have simply responded to the side effects: capex pressures, project delays and eroding margins,” they wrote in a note.

In an environment like this, the analysts expect M&A will continue to be a key theme in the gold sector. Over the last decade, a lot of the deals have involved large, low-grade deposits. Too many of these turned into disasters for the buyers, as costs went up and writedowns and CEO firings ensued. The analysts wrote that future M&A will likely involve projects with low capital intensity, favourable logistics and strong returns.

http://business.financialpost.com/2013/02/01/gold-production-cliff-ahead/