Industry Trend Analysis - Gold Sector To Remain Unattractive - MAR 2016

BMI View: Venezuela ' s gold sector will experience muted production growth as rising violenc e and a history of resource nationalism deter investment over the coming years, overshadowing significant natural resources and government efforts to develop the sector.

Venezuela will experience limited gold production growth over our forecast period to 2020, due to rising operating costs associated with violence in the country, strong government intervention in the sector and globally weak gold prices. Consequently, we forecast only limited growth in the country's gold output, from 375 thousand ounces (koz) in 2016 to 402koz by 2020, averaging 1.5% annual growth. The government's efforts to promote mining opportunities to boost foreign investment and generate additional foreign currency earnings will be unlikely to translate into results.

  • On February 24, Venezuela and US mining firm Gold Reserve reached an agreement over a disputed gold concession to create a joint-venture to exploit the Brisas and Las Cristinas, which holds an estimated 16.9 million ounces (moz).

  • In mid February, Venezuelan President Nicolas Maduro created a new state company, Compania Anonima Militar de Industrias Mineras, Petroliferas y de Gas (Camimpeg), to oversee the country's oil and mining industries.

  • On January 29, Venezuelan Oil and Mining Minister Eulogio Del Pino announced the country is certifying gold reserves and looking to produce diamonds.

Gold Output To Inch Higher
Venezuela - Gold Mine Production (LHS, moz) & Growth (RHS, % y-o-y)
e/f = BMI estimate/forecast. Source: BMI, USGS

Positive Developments To Hold Symbolic Value Only

We maintain this muted production forecast despite symbolically positive developments, as the deteriorating economic outlook fuels crime levels and Venezuela's nationalised extractive sector detracts from growth opportunities ( see: ' Spike In Violence Driving Away Foreign Investors ' , February 4, and ' Nationalised Sector To Deter Foreign Investment ' , January 14). Businesses will face limited growth opportunities and high fixed costs in the form of armed private security, onerous insurance costs, elevated foreign worker compensation requirements and crippling supply chain disruptions. Despite the agreement reached with Gold Reserve, the Brisas project remains in an early development stage, a number of foreign companies continue to seek reimbursement from Venezuela's expropriation of natural resource assets, and the possibility of nationalisation remains a risk. Furthermore, even after a recent upward revision to our gold price forecasts, we expect prices to remain weak, averaging USD1,120/oz over 2016-2020, compared to USD1,415/oz over 2011-2015, which in turn will make firms less willing to tolerate risk.

Low Return On Venezuela's Gold
Select Countries - Trade & Investment Risk Index (LHC) & Global Gold Prices (RHC, USD/oz)
f = BMI forecast. Source: BMI, Bloomberg