Will falling supply drive the gold price up?

It’s only a trickle at the moment, but it could become a flood if gold prices continue to fall. I’m talking about gold mines being closed or put on care and maintenance with operations suspended.

The price of gold fell from its all-time high of US$1,921 an ounce in September 2011 to its current price of around US$1,290 an ounce. That obviously has an effect on gold miners, and with the average global all in production cost per ounce estimated at anywhere between US$1,000 and US$1,300, what were once huge margins for gold miners are now wafer thin – if they’re lucky. Around the world, gold is also getting harder to find and more expensive to dig out.

However, not every gold mine has the same cost of production, and as a result several higher cost mines have been placed on care and maintenance – until prices recover somewhat. The issue for gold miners, especially the smaller and mid-tier miners is that if they only have one mine, the business goes into hibernation, folds or tries to do something else in the meantime.

That has happened to Australia’s Focus Minerals (ASX:FML). In April, Focus closed its Laverton operation, then in July shut The Mount underground gold mine, and yesterday announced that it had closed its remaining mines near Coolgardie. Now the company is expected to shift into exploration mode, firming up resources and looking for acquisitions.

The tumbling gold price has forced Silver Lake Resources (ASX:SLR) to defer one of its underground mines at Murchison, instead producing gold from several other open pits and stockpiles.

Here’s a sample of some more closures from around the world

  • Tanami Gold (ASX:TAM) has placed its Coyote mine on care and maintenance
  • Canadian miners Golden Minerals and Huldra Silver have both closed higher cost mines
  • AIM listed Goldplat closed its Kilimapesa gold mine in June
  • Resolute Mining (ASX:RSG) set to close its Golden Pride mine in Tanzania later this year, as it nears the end of its life
  • Canadian miner Elgin Mining shuts its Lupin mine
  • Richmont Mines closes Quebec gold mine (December 2012)
  • US Silver & Gold closes Drumlummon mine in Idaho in April
  • Kinross gold suspends operations at its La Coipa gold and silver mine in Chile in March

More mines are likely to follow, with very few of the world’s gold mines profitable at the current price. According to analysts, South African gold mines are the deepest and costliest in the world, but unprofitable at anything less than US$1,400 an ounce. AngloGold is the country’s only producer with costs below the current spot gold price, according to Bloomberg.

At the same time, the world’s largest gold mine by resources, underground operations at the Grasberg mine in Indonesia have been temporarily suspended, following the deaths of 28 workers.

Foolish takeaway

While not all gold mine closures are because of the low price of gold, it doesn’t take much to see a trend emerging. Some smaller miners are struggling to raise finance to begin operations or continue mining. Higher cost mines will have no option but to close, and we could see several small and mid-tier miners shut for good. It would be hard to see the larger miners making many acquisitions, when they have enough on their plates already. All in all, mine closures should see supply dry up, and could push the price of gold up.

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Motley Fool writer/analyst Mike King owns shares in Silver Lake Resources.

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