SURVEY: Gold prices and output to go higher in 2011, PwC

TORONTO - Despite the current strength in the price of gold, mining companies in Canada and globally are predicting high gold prices to continue throughout 2011, according to PricewaterhouseCoopers' 2010 Global Gold Price Survey Report released...

TORONTO - Despite the current strength in the price of gold, mining companies in Canada and globally are predicting high gold prices to continue throughout 2011, according to PricewaterhouseCoopers' 2010 Global Gold Price Survey Report released in mid-December.

Key findings:

  • A majority of 82% of gold producers expect their forecasted production levels to increase.
  • Nearly 75%of gold mining companies expect the price of gold to continue to rise until Q4 2011. However, the current price of gold is still far below the high of 1980 in real terms.
  • Gold companies predict the price of gold will peak between US$1,400 and US$3,000, with 40% believing the price will peak around US$1,500 when the survey was conducted in November 2010.

"Given the high demand for gold, it will be interesting to see if companies that have located marginal deposits of gold will kick-start their production and move faster than they would under normal circumstances," says John Gravelle, Canadian mining leader, PwC.

The survey found 70% of gold producers plan on using their additional cash influx to look for new projects or expand existing ones to replace or replenish reserves. The top three strategies are brownfield exploration (78%), greenfield exploration (54%), and mergers and acquisitions (37%).

"The number of mergers and acquisitions planned is in part explained by the correlation between the rising price of gold and the increase in deal activity," says Gravelle. "This year has seen a surge of mining deals take place, which was also a notable trend in 1980 when the price of gold was its highest."

Concerns over embattled currencies, particularly the US dollar and Euro, are helping to drive the price of gold up. Large deficits and rising levels of debt have placed pressure on the traditionally strong global currencies. As a result, more countries may continue to turn to gold as a substitute to holding weakening foreign currencies. Resource-rich countries may increasingly look at gold investments to limit increases in the value of their currencies (and the related harmful effects on their non-resource industries) by expanding money supply to make such purchases. Non-resource based economies that are export-driven may adopt similar strategies since lower local currencies can help their exports remain competitive.

Gold price hedging continues to be unpopular among gold companies. While the survey shows 26% of companies hold derivative or forward sales contracts to lock in the price of gold (up from 22% in 2009), 64% of companies that have these agreements are required to do so as an explicit condition of financing.

The high price of gold and positive outlook for 2011 is limiting the desire in the market to undertake hedging activity as evidenced by companies such as Barrick Gold, AngloGold Ashanti, and Resolute Mining that eliminated their hedge books in 2010.

For more information or to download the Global Gold Price Survey Report 2010, visit: www.PwC.com/ca/GoldPriceSurvey.

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