40 Year Outlook for the Australian Gold Mining Industry :

Transcription

1 40 Year Outlook for the Australian Gold Mining Industry : Richard Schodde Managing Director, Technical talk to the Melbourne Branch of the AusIMM 6 th February

2 1. Purpose & Objectives 2. Perils of Forecasting 3. Methodology - pricing, exploration & production 4. Modelled Results exploration success, existing mines and new projects 5. Combined Results 6. Sensitivity Studies 7. Summary/Conclusions Overview 2 2

3 It is not an advocacy document instead the aim is to get the facts onto the table for discussion 1. PURPOSE & OBJECTIVES OF THE STUDY 3 3

4 Report The study was commissioned by a group of 12 sponsors from Government, Research and Industry Similar reports on Australia s other key commodities (Base Metals, Uranium, Coal and Iron Ore) will be progressively released over the next few months A copy of this and other similar presentations can be downloaded from my website 4 4

5 Primary Objectives of the Report The 12 sponsors can be broken down into three groups State & Federal Geological Surveys (WA, SA, NSW, NT and GA) + Dept of Industry, Innovation & Science Industry R&D Groups (CSIRO, CET and DET CRC) Industry Lobby Groups (AMEC, AIG and CME WA) Each group has its own interests & priorities The Surveys need hard data to build the business case on why Government should support the mining & exploration industry principally the revenues and employment that flow from it The R&D Groups need hard data to assess the economic and social payoff from being smarter at exploration The Lobby Groups want to raise public awareness on the critical issue that exploration and mine development are both slow-burn stories. By the time you realise that production is falling, it may be too late to fix it 5 5

6 The only thing you can be sure of any single forecast is that it will be wrong 2. THE PERILS OF FORECASTING 6 6

7 Gold Price : Forecast vs Actual 2017 US$/oz $2,500 In spite of their best efforts, market analysts have a mediocre track record at forecasting $2,000 Actual Forecast $1,500 $1,000 $500 $0 Q Q Q Q Q Q Q Q Q Q Q Source: Consensus Economics, various years 7 7

8 Experts predict a looming shortage in copper supply Source: Wood Mackenzie Q as reported by Amerigo Resources Nov

9 but they always say this!! Déjà vu? Same forecast, but 6 years earlier The shortfall was to start in 2016! Source: Wood Mackenzie Dec

10 General issues with existing forecasts Often are single-line forecasts (no uncertainty!) Mainly focused on existing mines and known projects with a high-likelihood of development Use arbitrary rules of thumb on likelihood of Probable, Possible and Speculative projects being developed No adjustment for effect of changes of commodity prices on head grades / mine life / likelihood of mine development No allowance made for growing the resource (Often) no allowance made for exploration success These simplifications are OK if you are looking 5-10 years out... but not so if you are doing a 40 year forecast! 10 10

11 Incorporate price effects and exploration success. Need to factor-in uncertainty 3. METHODOLOGY 11 11

12 Model likely production from 3 sources Existing mines Possible new projects (based on known resources) Exploration success Future production will be influenced by the gold price Higher prices will encourage (marginal) new production to come online Lower prices will cause mines to increase their cut-off grade (so as to survive) but this severely impacts on the size of the remaining available resources Exploration spend (and the rate of discovery) is strongly influenced by commodity prices Embrace uncertainty Study Methodology Run 1000 different price scenarios Incorporate uncertainty into exploration success and timing of new projects 12 12

13 2017 A$/oz $3,000 Gold Price Forecast Forecast price paths have the same ranges and pattern as that seen in the past 68% & 90% Confidence Intervals for 1000 scenarios $2,000 $1,000 $702 $1629 in 2017 $1781 $1471 $2258/oz $1968/oz $1524/oz Forecast $1082 $793 $ Sources: Historical data from LME forecast from the Office of the Chief Economist March forecast from October

14 Exploration spend varies with the commodity price : Gold (in US Dollars) Gold price and exploration expenditures - World : US$/oz Au $2,000 $1,500 WORLD Gold Price 2017 US$ Billion $12 $10 $8 $12 $10 $ US$ Billion See similar correlations for other commodities R 2 = 0.81 $1,000 $6 $6 $500 Exploration Spend $4 $2 $4 $ $ Year $0 $0 $0 $500 $1,000 $1,500 $2, US$/oz Au Source: October

15 Predicted & Actual Exploration Expenditures GOLD Australia: A$ Million $1,400 $1224m $1,200 $1,000 $800 $600 $647m in 2017 Predicted model has an R 2 = 0.70 While not perfect this is usable for forecasting $400 $200 Actual Predicted $396m $ Note: The Predicted Spend is based on a multi-variate analysis, with key inputs being the relevant commodity price, years delay, and year-on-year price volatility. Model ignores data prior to 1995 as the industry was in an emergent phase (re: step change in prices, innovations in technology and the introduction of the gold tax in 1991) Source: October

16 Forecast Exploration Expenditures GOLD Australia: A$ Million $1,400 $1224m Forecast > $1,200 $1,000 68% & 90% Confidence Intervals $800 $600 $647m in 2017 $694m in 2021 $882m $805m $677m Forecast $550m $400 $200 Forecast (Mean) Actual Predicted $396m $475m $ Source: October

17 Forecast that 266 discoveries will be made over the next 40 years, and that half of these will be mined 4A. MODELLED RESULTS FOR EXPLORATION SUCCESS 17 17

18 Average Discovery Costs Australia: $200 $150 Average Discovery Cost (2017 A$/oz Au) 5 Year rolling average going forward assume A$70/oz and rising by A$10/oz per decade $100 $50 $ est Note: Discovery costs are based on a 5 Year Rolling Average data includes adjustment for likely resource growth & unreported discoveries. Source: October

19 Forecast Amount of Gold Found Gold deposits >100 koz Australia: Moz 50 Forecast > 40 Forecast (Mean) Unreported (Est) Actual Moz in Moz 6.3 Moz Forecast Moz Note: The large figure of 48.7 Moz for 1996 is due to the discovery of Cadia East (37.6 Moz) Source: October

20 Cumulative Number of Discoveries (and their contained metal) that become mines All Primary Gold Discoveries (>100 koz) in Australia found since 1980 Cumulative % 100% A: Number of Deposits Discovery Period Cumulative % 100% B: Total Metal 80% % 85% 60% Forecast 60% 50% 40% 20% The overall conversion rate is getting lower and slower 40% 20% Forecast 0% Years from Discovery 0% Years from Discovery Source: October

21 Likelihood of a discovery being developed Likelihood of Development 100% 100% 75% 62% 71% 68% 75% 76% 82% 50% 25% 27% 38% 38% 47% 52% On a weighted average basis, the overall likelihood of a discovery being developed is 50% Estimate that 76% of contained gold will be recovered 0% 0.1 to to to to to to to to 2 2 to 3 3 to 5 5 to 10 >10 Deposit Size (Moz) Source: October 2017 Note: Envelopes refer to the Confidence Intervals of 68% and 90% respectively for 1000 simulations

22 Moz pa 14 Forecast Gold Production from New Discoveries Australia: Forecast > 12 Production from Mines associated with New Discoveries Moz in Moz in Moz in Moz in Moz in Note: Refers to expected discoveries >0.1 Moz made post Includes adjustments for the likelihood of development and time delay for mine startup Source: October

23 Currently have 71 gold mines operating in Australia. This will drop to just 4 mines in 40 years time. 4B : MODELLED RESULTS FOR EXISTING MINES 23 23

24 Operating Gold Mines : 2017 N = koz Existing Mines Note: Bubble-size refers to gold production in 2016, or first full year of production (for mine re-starts) Refers to mines/projects producing gold as a by-product (i.e.associated with base metal production) Source: October

25 Forecast number of existing gold mines Australia: Number Mines in 2017 Forecast is based on current known MI&I Resources + resource growth from mine site exploration Mines in Mines in Mines in Mines in Note: Analysis limited to mines producing >10 koz pa Au The increase in number of mines between is due to commissioning of mines currently under construction. Analysis assumes additional resources are found at existing operations which extends the mine s life. Source: October

26 Forecast gold production from existing mines Australia: Moz pa Moz in 2016 Actual Forecast [Current Resources + Mine Site Discoveries] Moz in Moz in 2025 The range of output is driven by the uncertainty of the gold price (and the potential need to high-grade the deposit) Moz in Moz in Moz in Source: October

27 Resources do grow over time Ratio of Current Pre-Mined Resource Ounces versus Reported Ounces at mine start up Pajingo Paracatu Grasberg 224% 165% 90% Upper Range Average Lower Range Years after mine start up Note: Analysis based on 27 gold deposits >1 Moz found and developed in the World since 1975 Resource figures have been adjusted for changes over time in the cut-off grade Pre-Mined Resource = Current Resource + Cumulative Historic Production (adjusted for processing losses) Source: August

28 Have identified 64 gold projects in Australia. 20 of these might be developed over the next 40 years 4C: MODELLED RESULTS FOR NEW PROJECTS 28 28

29 Gold Projects : 2017 N = 64 (including 15 mines currently under Care & Maintenance) 1000 koz New Projects Note: Bubble-size refers to gold production in the first full year of operation Refers to mines/projects producing gold as a by-product (i.e.associated with base metal production) Source: October

30 Forecast number of Mines from New Projects Australia: Number Have used the same scale as that for Existing Mines Mines in Mines in Mines in Mines in Note: Analysis is based on projects currently at the Pre-Feas / Feasibility Study Stage, plus mines presently under care & maintenance Source: October

31 Forecast Gold Production from New Projects Australia: Moz pa New Projects + Mines under C&M After adjusting for the likelihood of development and factoring in startup delays, likely production from new projects will peak in Moz in Moz in Moz in Moz in Moz in Note: Analysis is based on projects currently at the Pre-Feas / Feasibility Study Stage, plus mines presently under care & maintenance Source: October

32 Operating Gold Mines & Projects Mines & Possible Projects New Projects 1000 koz Existing Mines Note: Bubble-size refers to gold production in 2016, or first full year of production (for new projects and mine re-starts) Refers to mines/projects producing gold as a by-product (of base metal production) Source: October

33 Operating Gold Mines & Projects 2017 : 71 Mines + 0 Projects With >50% chance of operating in given year New Projects 1000 koz Existing Mines Note: Bubble-size refers to gold production in 2016, or first full year of production (for new projects and mine re-starts) Refers to mines/projects producing gold as a by-product (of base metal production) Source: October

34 Operating Gold Mines & Projects 2027 : 37 Mines + 9 Projects With >50% chance of operating in given year New Projects 1000 koz Existing Mines Note: Bubble-size refers to gold production in 2016, or first full year of production (for new projects and mine re-starts) Refers to mines/projects producing gold as a by-product (of base metal production) Source: October

35 Operating Gold Mines & Projects 2037 : 12 Mines + 5 Projects With >50% chance of operating in given year New Projects 1000 koz Existing Mines Note: Bubble-size refers to gold production in 2016, or first full year of production (for new projects and mine re-starts) Refers to mines/projects producing gold as a by-product (of base metal production) Source: October

36 Operating Gold Mines & Projects 2047 : 7 Mines + 3 Projects With >50% chance of operating in given year New Projects 1000 koz Existing Mines Note: Bubble-size refers to gold production in 2016, or first full year of production (for new projects and mine re-starts) Refers to mines/projects producing gold as a by-product (of base metal production) Source: October

37 Operating Gold Mines & Projects 2057 : 4 Mines + 1 Projects With >50% chance of operating in given year New Projects 1000 koz Existing Mines Note: Bubble-size refers to gold production in 2016, or first full year of production (for new projects and mine re-starts) Refers to mines/projects producing gold as a by-product (of base metal production) Source: October

38 Includes production from existing mines, new projects and exploration success 5. COMBINED RESULTS 38 38

39 Forecast Head Grade Australia: g/t Au 6 Forecast > g/t Note: Excludes mines where gold is produced as a by-product Source: October

40 Forecast Gold Production Australia: Moz pa Moz in 2017 Forecast > in Moz in 2035 A: PRODUCTION 5.70 Moz in % & 90% Confidence Intervals Moz Forecast Note: Analysis assumes additional resources are found at existing mines and projects currently under feasibility study Source: October

41 Forecast Number of Gold Mines Australia: Number Forecast > 90 in 2021 B: NUMBER OF MINES Mines in Mines in Forecast Note: For Mines > 10 koz pa Au Source: October

42 Forecast Number of Workers in the Gold Sector Australia: Number 40,000 Forecast > C: NUMBER OF WORKERS 30,000 30,080 27,980 32,100 26,500 in 2025 NOTE: Half of the decline in employment is due to automation 20,000 10,000 Actual 18,880 14,000 in in ,300 11, Forecast Forecast Total Note: Excludes greenfield exploration and construction workers Source: October

43 Forecast revenues from gold production Australia: A$ Billion $25 Forecast > D: REVENUE $20 $15 $16.6 B $17.8B in 2020 $14.7B in 2025 $10 $10.4B in 2035 $8.8B in 2045 $12.74 $10.28 $5 $6.4 B $7.3B Forecast Total $4.27 $2.80 $ Source: October

44 Summary 44 44

45 Moz pa Moz in 1998 Forecast sources of Gold Production 6.9 Moz in 2008 Australia: Moz in 2017 Forecast > 11.3 Moz in 2021 By 2032, half of all production will come from deposits yet to be discovered Exploration Success New Projects Existing Mines Historical Moz in Moz 0.3 Moz 0.4 Moz Note: Mean/Average forecast only. Due to uncertainty in commodity prices and exploration success the likely forecast figure (at a 90% Confidence Interval) will vary by +/-40%. Source: October

46 Critical Issue : The slow-burning story By 2032 (i.e. in 15 years time), half of all Australia s gold production will come from deposits yet to be discovered Of concern is the fact that the average delay between discovery and development is 13 years If we don t act now, and support exploration today there is a real risk of a significant supply disruption in the medium-term 46 46

47 Future production is very sensitive to changes in gold prices, exploration spend and discovery performance 6. SENSITIVITY STUDIES 47 47

48 Effect of changes in the GOLD PRICE 48 48

49 Impact of change in Gold Price on Production Incremental change in gold production in Australia: Moz pa plus 10% over Base Case plus 5% over Base Case minus 5% over Base Case minus 10% over Base Case Industry s response to a fall in gold price is to increase the head grade (i.e. high-grade the deposit leading to a short term increase in production, but this is at the detriment of the mine s life and long term production. and the opposite occurs when prices rise Note: Base Case assumes a starting gold price of A$1629/oz in Source: October

50 Impact of change in Gold Price on Number of Workers Incremental change in number of people working in the gold sector in Australia: Number of Workers 4,000 3,000 2,000 plus 10% over Base Case plus 5% over Base Case minus 5% over Base Case minus 10% over Base Case 1, ,000-2,000-3,000-4,000 Note: Base Case assumes a starting gold price of A$1629/oz in Source: October

51 Effect of changes in EXPLORATION SPEND 51 51

52 Impact of a step increase in exploration spend Incremental change in revenues from spending and extra A$1 billion on gold exploration in Australia: A$ Million $800 $600 $400 $613 m in 2031 Spending (say) an additional $100 M pa on exploration over a decade (ie $1 Billion in total) will generate an extra $11.4 Billion in revenues in subsequent years Incremental revenues generated from additional gold deposits found and developed $200 Spend an extra $100m per annum for 10 years (from ) $ Source: October

53 Effect of changes In the SPEED OF DISCOVERY/DEVELOPMENT 53 53

54 Impact of change in the Speed of Discovery Incremental change in gold production in Australia: Moz pa Year Slower 1 Year Faster 2 years Faster Speeding up the exploration process by (say) one year will result in a Moz pa increase in Australia s mine production in the medium term Note: Base Case assumes a unit discovery cost of A$70/oz rising by $10/oz per decade. Source: October

55 Effect of changes in EXPLORATION PERFORMANCE 55 55

56 Effect of improving exploration performance on the likely amount of gold found in Australia: Moz Unreported (Est) Actual Forecast > x Improvement x Improvement 1.5x Improvement BASE CASE Caution: Forecast figures are mean only. In any given year the likely figure may vary by +/-40% Note: Analysis assumes that exploration performance (discovery cost per ounce) is progressively improved over 10 years from Base Case assumes a discovery cost of A$70/oz, rising by $1/oz pa Source: October

57 Effect of improving exploration performance on gold production in Australia: Moz pa 16 Forecast > To maintain long term production at 2017 levels, industry needs to improve its current discovery performance by more than 2x Moz in Moz in Moz 3.0x Improvement Moz 2.0x Improvement Moz 1.5x Improvement Moz BASE CASE Note: Analysis assumes that exploration performance (discovery cost per ounce) is progressively improved over 10 years from Base Case assumes a discovery cost of A$70/oz, rising by $1/oz pa Source: October

58 Impact of 2x improvement in exploration performance Incremental change over the Base Case Discoveries & Production (Moz pa) 10 Revenues (2017 A$m) and No of Workers (#) Additional Ounces Found [<- LH Scale] Additional Employment [RH Scale ->] 7160 workers Moz 6 Additional Revenue [RH Scale ->] $6232m Moz Additional Gold Produced [<- LH Scale] Note: Analysis assumes that exploration performance (discovery cost per ounce) is progressively improved over 10 years from Base Case assumes a discovery cost of A$70/oz, rising by $1/oz pa Source: October

59 7. SUMMARY / CONCLUSIONS 59 59

60 Summary / Conclusions [1/5] 1. Landmark Report looks out 40 years - Forecasts the discovery rates, number of mines, production, employment and revenues for the Australian gold industry - Embraces uncertainty models 1000 different scenarios - Takes into account role of exploration success 2. Three groups of sponsors Govt Agencies, R&D Institutes and Industry Lobby Groups. Each has their own objectives - Business Case for supporting exploration and mining -Value created from being smarter at exploration - Quantify the looming shortfall in production (in the next decade) and explain why we need to act now 60 60

61 3. Results Moz pa Historical Forecast 9.70 Moz in 2017 Summary / Conclusions [2/5] A: PRODUCTION % & 90% Confidence Intervals 4.69 Moz Number mines in 2017 B: NUMBER OF MINES Mines No of Workers 40,000 30,000 27,980 in 2017 C: EMPLOYMENT 2017 A$ Billion $25 $20 $16.6b in 2017 D: REVENUE 20,000 10,000 18, ,300 Workers $15 $10 $5 $6.1b $ $7.3b Source: October

62 Summary / Conclusions [3/5] 3. Results continued - Over the short-term (next 5 years) production will be dominated by existing mines - In the medium term (5-10 years out) production will start to come from new mines based on known deposits. However, its not enough to offset the decline - In the long term (10-40 years out) exploration success will play a major role in overcoming much of the looming shortfall in gold production Even so, production and revenues are set to fall by half over the next 40 years Consequently, in forty years-time almost all of Australia s future gold production with come from exploration successes 62 62

63 Summary / Conclusions [4/5] 5. It is significant to note that in 15 years-time half of Australia s gold production will come from mines that are yet to be discovered 6. Of serious concern is the fact that the weighted average delay between discovery and development for a new discovery is 13 years Consequently, government and industry need to support exploration today. We only have the next couple of years to properly identify and address ways to improve our exploration performance - otherwise Australia runs the real risk of a significant supply disruption in the medium-term 7. Sensitivity Studies show that: - Sensitivity studies indicate that each additional dollar spent on exploration generates an extra $11.40 in revenue - For the gold industry to maintain production at current levels in the longer term, it will either need to double the amount spent on exploration or double its discovery performance 63 63

64 Summary / Conclusions [5/5] The study is premised on business-as-usual. The opportunity exists for industry and government to take the initiative to invent its own future. In addition to developing policies that encourage/stimulate exploration, the opportunity also exists to be more efficient and effective at making discoveries. The challenge is that many of these initiatives require effort (and money) and will take several years to bear fruit

65 Contact details Richard Schodde Managing Director Melbourne, Australia Website: MinExConsulting.com Copies of this and other similar presentations can be downloaded from my website 65 65