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All That Glitters IS Gold!

February 10, 2012
Jacqueline Palladini Jacqueline Palladini
Economist

Gold mines are sprouting up all across Canada; with gold prices pushing $2,000/troy oz, it’s no wonder! Canadian gold production is expected to almost triple by 2016 compared with 2010.1 Not only will increased gold production bring revenues to mining companies, the income will spur economic activity across other sectors, create jobs and boost tax revenues.

Gold production increases acros the country chart

The Conference Board estimates that gold production in Canada will increase by 5 million ounces per year by 2016 compared to 2010. Meanwhile, the price of gold will remain high compared to historic norms, and this will allow annual mining revenues to more than double over the same period. Cumulative revenues from gold mining are expected to top $50 billion over 2011–2016.2

Gold glitters across the country

The gains from gold mining will be widespread—every territory and almost every province will see gold production increases over the next five years. The Conference Board estimates that 45 mines across the country will either boost or begin production of gold over 2012–2016. This means that the federal government as well as several provincial, municipal, and aboriginal governments may be able to collect royalties and taxes in both the construction and production phases of mine development. Construction and transportation companies will also benefit from the increased mining activity. The biggest boosts to production are expected to be in Quebec and Ontario; annual gold production will increase by 1.5 million troy oz in each province. Nunavut and British Columbia will follow with annual increases of roughly 500,000 troy oz each.

Prices will peak

Gold prices to peak in 2012Nominal prices have been increasing since 2001, primarily driven by falling global production. However, prices really began to skyrocket following the financial crisis in 2008, as investment demand more than doubled. As a result, mining companies have been staking claims and boosting production across the country in an attempt to maximize revenues. Prices are expected to continue to climb in 2012, but the World Bank expects 2012 to be the peak of the price increase. The global “fear-factor” effect that turned investors to gold during the financial crisis is expected to lessen in 2013, while the threat of high inflation—which makes gold a relative store of wealth—is no longer on the radar. Moreover, additions to global production capacity for gold (including scrap) and buyer restraint due to high prices will contribute to a slow and steady decline in the price of gold over the remainder of the forecast. However, prices are expected to remain elevated by historical standards (at more than $1,000/troy oz); this is generally well above production costs, so mining companies are expected remain profitable.

Employment and income

The higher levels of production will result in job creation across the country. Workers will be needed to build the project sites and infrastructure, mine the gold, and transport and trade the goods. Investments in machinery and equipment will increase. Jobs will be created. But will there be enough workers? Miners are an aging lot in the Canadian economy, and employers must compete with other industries such as forestry and oil and gas for labour. The industry may have to look hard for both workers and production gains. Accomplishing either will eat into their profits, but the high prices will give them the added flexibility.

The expected surge in gold production highlights how in addition to energy and agriculture Canada is benefiting from the global commodities boom. It would take a much larger correction in gold prices than the one currently envisaged to derail the interest in expanding gold production. As such, the greatest risk to the outlook may be finding enough workers with the right skills to develop and work the mines. However, the production timeline is a short one, and it corresponds with historically high gold prices and a workforce that is near—but not quite at—retirement. It appears all stars are aligned over the near term for the gold mining industry to glitter.

1  All figures are net totals and take into account mine closures and supply reductions as well as increases.

2  Revenues are calculated using the World Bank’s January 2012 forecast for the price of gold.

 

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