When the miner responsible for nearly 10% of global gold production begins to balk at major development projects in response to wildly escalating capital costs and steadily climbing production costs, the implications for future supply and price dynamics can no longer go ignored.
Earlier this year, I used Barrick Gold
Accordingly, after holding my target steady at $2,000 since 2007, I'm officially raising what I consider to be my ultra-conservative price target to $2,250 per ounce. And, because the rating agencies are permitted to hint at the likely direction of a subsequent call, let's just say that gold remains on "watch positive."
At current gold prices, there simply is not enough meat left on the bone for miners after factoring in the still-escalating costs of production, the skyrocketing capital costs of mine construction, larger slices of the pie demanded by national (and in some cases even provincial) governments, etc. When taking on substantial jurisdictional and execution risk, as miners routinely do, comprehensive all-in margins must present a rational reward. Otherwise, miners will simply begin to shelve their projects, and that's precisely what we're seeing in this industry with rapidly increasing frequency.
Ceaselessly climbing costs
Readers will recall that Kinross Gold
Meanwhile, even those projects that are going forward are doing so with an adjusted set of economic expectations. Barrick announced a 50% to 60% increase to the projected construction budget for its Pascua Lama project, bringing that price tag to an eye-popping range between $7 billion and $8 billion! Projected cash costs of production likewise suffered an upward revision, and Barrick pushed the timeline for first production back to 2014 from 2013. In a plan hatched years before former CEO Aaron Regent took the reins at Barrick, the company sought to manage the massive construction project internally. Recognizing that the scale of this project went "beyond the capabilities" of Barrick's in-house team, the miner will now look to contractor Fluor
Operating costs of production at existing mines continue to climb, as well and, just like the capital-cost issue, this is an industry-wide phenomenon. Even the master executors at Goldcorp
The verdict is in: gold prices will go much higher
It's really quite simple. At current prices, the trailing trend of expanding global production is losing steam very quickly. Given the severely impaired state of the gold equity market -- particularly among the junior explorers that play such a monumental role in locating tomorrow's gold supply -- the industry's inadequate capital investment at present will not sustain the rate of discovery required to replace mined production.
Because I believe investment demand for gold will continue to grow as global currencies remain locked in a battle of competitive devaluation, I see supply and demand dynamics moving in opposite directions. In so doing, I believe those dynamics are stretching a giant elastic that will ultimately snap-back in the form of a sharp, upward re-pricing of gold. I urge investors to move into position with an allocation to carefully selected gold equities that suits their comfort level, and I encourage readers to track my ongoing coverage by bookmarking my article list or following me on Twitter.
Looking for more ideas? Download The Motley Fool's special free report " The Tiny Gold Stock Digging Up Massive Profits ." Our analysts have uncovered a little-known gold miner that we believe is poised for greatness; find out which company it is and why we strongly believe in its future -- for free!
Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Goldcorp. The Motley Fool owns shares of Fluor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.