Rising mining costs and record gold demand shape investment landscape, says Sprott Asset CEO

Tue Nov 05 2024

The gold mining industry faces mounting pressures as record-high demand meets sharply rising operational costs, according to Sprott Asset Management CEO John Ciampaglia. 

Gold prices remain near record highs at $2,735 per ounce, but keeping up with these inflation-driven costs has become increasingly challenging. Newmont Corporation, the world’s largest gold producer, recently saw its shares tumble 15% following disappointing earnings, citing a more than 50% rise in all-in-sustaining costs (AISC) since 2020 due to inflation in labor, energy, and materials. 

In a recent interview with Kitco Mining, Sprott Asset Management CEO John Ciampaglia underscored the impact on miners: “When one of the world's biggest gold miners signals that their cost inflation is still an ongoing issue, and there's that margin compression, you're just not getting that operating leverage you’re trying to achieve,” he explained. “This cost pressure is significant and is squeezing margins across the board. It’s not just about higher metal prices; it’s about being able to sustain those profits in a high-cost environment.”

Gold demand has surged over 30% this year, propelled largely by strategic central bank buying. According to the World Gold Council’s Q3 2024 Gold Demand Trends report, total global demand rose by 5% last quarter, marking a new high of over $100 billion in value for the period. Central banks—particularly from BRICS nations like Brazil, Russia, India, China, and South Africa—have taken a leading role in gold acquisitions. "Central banks are less sensitive to the price,” Ciampaglia remarked. “They have very specific goals around accumulation of gold." He highlighted that the geopolitical landscape is prompting many countries to diversify reserves away from the U.S. dollar, with BRICS nations leading this shift. “It’s a strategic move,” he noted. “China and Russia, in particular, are building up their gold reserves to ensure resilience against dollar volatility and to signal to the market that they’re betting on gold as a stable reserve asset.”

The World Gold Council’s report underscores this central bank buying trend, with 694 tonnes of gold purchased year-to-date, keeping pace with last year’s record levels. According to Ciampaglia, “This unprecedented level of central bank buying is a clear indication of the changing dynamics in global finance.” 

He elaborated on why this trend is unlikely to slow down: “Gold offers a unique value as a store of wealth and stability that fiat currencies increasingly lack, especially in volatile economic conditions. This sustained buying from central banks, even at high prices, is about achieving long-term stability, not short-term gains.”

Ciampaglia also pointed to the upcoming U.S. election as a potential turning point for mining regulations, which could shape the sector’s future in different ways. “If Harris wins, we may see stricter environmental standards, likely raising costs for domestic miners,” he said. “If Trump, we could see a shift toward resource independence, easing some regulatory pressures and possibly spurring investment in U.S.-based projects.” Canada, Ciampaglia added, is uniquely positioned to benefit from this heightened focus on critical minerals. “Canada’s stable jurisdiction and responsible mining practices make it an attractive source for critical minerals needed for energy transition. It’s not just about precious metals; lithium, copper, and other resources essential for modern infrastructure are coming to the forefront.”

For more of John Ciampaglia’s detailed insights on gold demand, cost challenges, and the geopolitical factors impacting the mining sector, watch the full interview above.

Source: https://www.kitco.com/