Gold prices may hit $2,000 an ounce in 2013 as costs and barriers to production restrict supply, while demand from central banks and Chinese consumers keeps climbing, the world's biggest gold producer said. Barrick Gold Chief Executive Jamie Sokalsky said finding new mines, negotiating permits and dealing with communities and governments is proving tough, while building costs for new mining capacity have skyrocketed.
At the same time, economic uncertainties and new investment tools in Asia have driven more investors into the precious metal, boding well for prices, he said. "If demand continues to rise, which we think it will through China buying more gold, more investment demand for gold, (and) central banks continuing buying more gold rather than selling as they used to, I feel quite comfortable predicting that gold prices will within the next year be at $2,000, perhaps higher," Sokalsky said. "It's going to be a demand-driven type of move."
The break-even price for gold producers is about $1,500 an ounce, including capital, exploration, administration expenses and interest, he said. Spot gold is currently near $1,735, well below last year's record $1,920.30. It is up more than 10 percent this year, but trading has been choppy, with a surge to year highs in the third quarter petering out below $1,800 an ounce. A Reuters poll conducted after the third quarter showed analysts expect gold to average above $1,850 next year, a new record on a full-year basis.
The high prices, and expectations of more rises should encourage producers to expand but Barrick is not alone in facing challenges with new projects. Earlier this month it raised its cost estimate for its vast Pascua Lama mine on the Chile-Argentina border to $8 billion-$8.5 billion from $7.5 billion-$8 billion, and pushed back the date when the project will begin producing. "We don't see significant production growth even in this high gold price environment," Sokalsky said. "The supply outlook is at best around flat to maybe marginally up. Many companies have announced cancellations of projects, and grades are going down in the industry," he said.
The company is also in the process of negotiating the sale of its African Barrick unit to China National Gold Group (CNGGC). Sokalsky said the negotiations were ongoing, but declined to elaborate. Another reason why producers are struggling to raise output is that the costs and risks of on the ground investment have led many investors to profit from a decade-long rally to buy in to exchange-traded gold funds rather than gold companies.
Miners are now trying to lure investors back, Sokalsky said. "The pendulum now has the potential of swinging the other way," he said. "Gold equities could start to outperform because we just need to prove that we can do the right things, manage the business better, generate more return and cash flow." "If we can show that we can earn more leverage as the gold price goes up, we are going to attract more money back to equities rather than ETFs." Sokalsky, who took over the top executive position in June, has vowed to focus on generating more return and free cash flow for the company, whose shares have fallen more than 20 percent this year.