Miners will need $3,000 gold price to be profitable, WGC head says

Miners will need $3,000 gold price to be profitable, WGC head says
Submitted by cpowell on Tue, 2012-05-15 13:42. Section: Daily Dispatches
From Reuters
Monday, May 14, 2012

Sharp increases in mining costs mean gold will need to reach $3,000 an ounce in five years for the industry to stay profitable, World Gold Council chief executive Aram Shishmanian said on Monday.

Miners currently needed a gold price of $1,300 to survive, Shishmanian said, but faced steep rises in mining costs, along with the cost of dividends and host nation taxes.

"If this continues for the next five years the gold price needs to be at least $3,000 just to stay in the business," he said. However, he was optimistic sustained demand would drive prices higher over the long term.

Spot gold fell to a 4 1/2-month low of $1,556.5 an ounce on Monday on concerns over the European debt crisis. Normally a refuge for investors in times of economic turmoil, gold has recently traded in line with risk assets like base metals and stocks.

Future demand would come from emerging markets, central banks and investors, Shishmanian said, noting that China and India now represent 55 percent of the world gold market.

"Emerging markets are going to hold increasing amounts of gold reserves," Shishmanian said. "Holding billions of dollars doesn't help them. The alternative potentially is gold."

Exchange traded funds backed by gold currently hold $120 billion, he said.

"This is the tip of the iceberg," he said. "U.S. pension funds do not hold substantial amounts of gold but we see that changing over the next 20 years."

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The average production cost of the world's biggest producer - South Africa - is about $238 per troy ounce. 1997 industry estimates by the Federal Reserve Board suggested an average production cost worldwide of $300 per ounce.

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Will 'Peak Gold' Exploration Continue to Grow?

-- Posted Thursday, 24 May 2012
Source: GoldSeek.com

Global gold production is at an all-time high, according to a new report from the U.S. Geological Survey. In this exclusive interview with The Gold Report, the Survey's Mineral Commodities Specialist Micheal George pinpoints where the gold is coming from and what trends can be expected in the coming years.

The Gold Report: The U.S. Geological Survey's (USGS') Mineral Commodity Summaries (MCS) 2012 describes world mine production and reserves by country. What are the biggest changes from last year?

Micheal George: There weren't a lot of big changes other than replacing reserves that were mined during the previous year. The largest changes were Australia increasing reserves by 100 tons (t) and Canada decreasing reserves by 70 t. The reason behind Canada's decrease was the closure of mines due to exhausting mineable reserves. Australia's increase was due to adding new mines to its potentially active mine list.

Annual world mine production increased approximately 5% in 2011. It was the third year in a row of an increase in production and marked an all-time high for gold produced since recorded history. Compared to the recent low in 2008, production is up about 19% or 440 t. So it's recovered quite a bit.

TGR: What are the reasons for higher gold production? Is it simply because the gold price was higher?

MG: The gold price was higher, so more mines are processing, and they're pushing out more gold. A lot of it is coming from China right now. Quite a bit of gold is coming from other countries as well.

TGR: Are mining companies replacing reserves through exploration or acquisition?

MG: Both. Nowadays, a lot of the additional reserves have been coming from exploration, mainly around the deposits that are currently being mined.

TGR: How does the USGS estimate reserves for this report?

MG: Reserve estimates are calculated by the government in each country in the report. For example, the Australian government or Canadian government does research and revises reserve numbers and that is what we use in the report. The USGS also researches public company reserve reporting. Sometimes we use company published reserves if we know all of the companies in a country. For example in Papua New Guinea, all the mining companies are publicly traded, so they all have to report their reserves.

TGR: How about production and reserve numbers from China?

MG: The production numbers are straight from the Chinese government. I don't think it has updated countrywide reserves in the last couple of years. If it has, we don't have a new number from it.

TGR: Are you saying the change in gold price and increase in production over the last year hasn't materially changed the reported gold reserves in China?

MG: In our publication, yes, China's reserves have not changed too much mainly because we don't have any new reports out that have updated reserves or that Chinese miners have just basically replaced what they've mined out in recent years. Reserves are a moving target. It's constantly changing based on price, based on technology, based on a whole host of factors.

TGR: At these prices, are we running out of gold? In the energy sector, we hear about "peak oil." We don't really hear about "peak gold." Is there such a thing?

MG: "Peak gold" doesn't really work as a theory. There have been several historical "peaks" in gold production. There was a peak in U.S. gold prior to World War II in 1938 at 161 t. Production then dropped during the war because of a shift to wartime materials. Gold production trended downward until the 1970s because of low gold prices. After a sudden increase in gold prices in the 1980s, a rush to find new gold deposits led to the discovery of additional deposits in the Carlin trend area in Nevada. The Carlin mine had been operating since the 1960s, mining these massive, low-grade deposits. At that time, USGS geologists were out there and investigating these deposits. The U.S. Bureau of Mines helped develop the process of cyanide heap leaching, which, in turn, allowed the low-grade deposits to be economically developed. That caused a substantial increase in U.S. gold production. By 1998, we hit another high of U.S. gold production at 366 t. But at the time, the price of gold was at a historical low. By 2002, the price started to increase and has steadily increased through today. The persistent high gold price has led to increased production in 2010 and 2011, with new mines coming on-line and existing mines expanding operations. Continued exploration spurred by the high gold price has led to numerous discoveries, some of which have quite a bit of reserves, such as on the Cortez trend. There is a mine that just started up a couple of years ago that has a huge reserve right now. The world follows a similar pattern as the U.S., with multiple peaks in production over time.

In this way, gold is unlike oil, which is a consumed material. Gold is unique in that it's an investment, not merely a commodity. Because of its value, gold is rarely ever consumed in a traditional sense. It's nearly indestructible, and it's nearly completely recycled. I think the only gold use I found that isn't recycled is in spacecrafts. This means that an increase in demand may not be solely met by new supply. It could be met by scrap supply. It also takes decades for gold production to respond to price movements because of the time lag it takes from deposit discovery to production. It could take decades for a mine to start up. Also, when gold prices are low, production generally plateaus and may decline, owing to a lower rate of return on investment. At the same time, exploration for new deposits is minimal because companies need to reduce their expenses and they don't go looking for new deposits. That's what happened in the 1990s and early 2000s. There were historically low levels of exploration, so we had this time lag of about 10 years. Now, we're seeing the gold price affecting production and causing production to go up where we didn't see that a couple of years ago.

TGR: Is there a similar situation on the supply side where it takes decades or a long period of time to create sustained demand? Perhaps demand in China is an example?

MG: Not necessarily because demand can really bounce around quite a bit. You have a huge pool of recycled material sitting out there. So if the price gets high enough, people are willing to give up their gold.

TGR: Comparing gold to oil again, one meaning of "peak oil" is that we are running out of cheap and easily obtained oil. Now there's a lot of oil, but it's expensive to get to. Is there a similar situation for gold? As long as the price is high, people are going to look for it, but is it becoming more and more expensive to find, mine and process?

MG: Only when you compare dollars to dollars. Yes, it is more expensive to look for gold now than it was previously, but not significantly. If you put inflation factors on it, exploration and production costs have not risen nearly as much as for oil. However, when the price of gold goes up dramatically, companies will mine lower grade deposits. So if the gold price drops significantly, then ore grade would actually go up. Right now, miners evaluate deposits based on where the deposit ends or where the pit wall is going to be. The mine gets bigger as the price goes up, and the mine gets smaller as the price goes down. With a lower gold price, they are going after higher-grade deposits. But with a high price, they are going after as much ore as they can produce that is profitable.

TGR: You also mentioned that as the price of gold goes up, spending on gold exploration goes up. The 2010 Minerals Yearbook just came out. It says that gold was the primary mineral exploration target with more than 50% of the world's non-ferrous exploration budget of $5.4 billion, 59% more than in 2009. Do you see that trend continuing?

MG: Yes. That trend has continued from 2011. It has gone up again, and gold is still more than 50% of the targeted materials.

TGR: What is the next most popular mineral for exploration?

MG: Probably copper. It gets a little fuzzy because miners may be going after copper porphyry, but copper porphyry also has gold in it. But it's probably copper.

TGR: Is the nature of the mining industry still cyclical?

MG: Yes, it's just how mining is. There are boom and bust periods. The successful companies are able to spread out their risks more than others. They're making huge profits right now to make up for huge losses coming up. Mining is one of the few industries where the companies know they're going to have a big loss coming up eventually. The industry is cyclical. Gold prices go up, gold prices come down. In mining, they have to balance out the really good years with the really bad years. Hopefully the gains and losses offset and the companies make a profit over 30 or 40 years.

TGR: A large component of domestic gold supply listed in the MCS was imports of ore and concentrates from Mexico. How do those fit into the market?

MG: That is cross-border refining. Mexico doesn't have enough refining capacity to refine its own ore so it is sent across the border, sometimes by the same company owning both properties in the U.S. and in Mexico. Ore is sent to the U.S. to be further refined into either dore or bullion to be sold on the market. Sometimes, refined ore will be shipped to another country, say, Switzerland, where it's further refined into bullion, which enters into the London market to be sold.

TGR: Let's dig a little more into the recycling market. Last year, the U.S. had 225 t of gold recycled. That was approximately equal to the domestic mine supply.

MG: Yes. Regarding scrap, the price is driving people to give up their gold. Television commercials for buying gold air every day, and that's essentially what's driving the market. People are parting with their gold jewelry that they don't want anymore.

TGR: But for every buyer, there's a seller. So who's driving the demand side?

MG: Investment is driving the demand side, especially worldwide investors. Across the board, even in the U.S., people are investing in gold as a safe haven. They don't want to invest in the dollar or the euro because they aren't doing so well. So they find something else that is gaining value and that gives them a good rate of return but also has the liquidity in that they can sell it anytime, anywhere. Even if the world economy collapsed, gold would be valued by somebody somewhere.

TGR: Is this individual investors or central banks or both?

MG: Both. Central banks have historically been sellers on the market until 2010. Now they are buyers. The sellers are traditionally the European banks, and now we're seeing buyers from non-European banks.

TGR: What about institutional investors?

MG: Oh, yes, they're buying gold, too. Everyone from Joe Public to the Russian Central Bank and Chinese Central Bank is buying gold. Everyone is buying gold for investment.

TGR: We hear a lot about emerging geographies for gold exploration and mining. What about Africa? What are the largest producing countries in Africa?

MG: Africa as a continent is one of the largest gold producers, and it has more reserves than most of the other areas because it's underdeveloped right now. I just got some new numbers that show this year the third largest producer in Africa is Tanzania. Mali, which is now number four, went up, but Tanzania went up by more. Their numbers are pretty close to each other, so they probably will flop back and forth. They both have several large mines owned by multinational companies, so they're pretty stable owners. However, they won't catch up to South Africa any time soon.

TGR: South Africa is still number one?

MG: South Africa is number one, but it's falling just because of its age. Its mines are so much older, so much deeper and so much more complex. It's also been having labor issues. Across the board, costs have gone up. Everything is underground, and there are some mines that are two miles underground.

TGR: What country is number two in Africa?

MG: Number two is Ghana. Ghana is almost double Tanzania and Mali. South Africa is another 100 t above Ghana. So there's still room. No one is going to catch South Africa right away. It will take years.

TGR: And how is the U.S. doing?

MG: U.S. production is increasing. It increased again last year a little bit.

TGR: According to your report, annual production is approximately 230 t?

MG: It's been about that for a while. Some of the larger mines are aging so they're showing some drops in production. It can be hard to get new mines started in the U.S. The U.S. has several world-class deposits that are either in lawsuits or just having difficulties getting permitted.

There is a lot of gold up in Alaska that is untouched. There are a lot of areas in Alaska that are untouched for exploration also. Nevada still has quite a few deposits that are not developed that can come on-line soon. As I said, Cortez came on a couple of years ago, and now it's a huge mine.

TGR: Are there other areas in the U.S. that might contribute to gold production in the future? North Carolina has seen some activity during this cycle.

MG: North Carolina is an interesting area. It's all on private land. Mining companies own the land, so they don't have to worry about permitting like out West, where they have to permit through the Bureau of Land Management or the Bureau of Reclamation. They just have to get their permits through state agencies. It's a little easier that way. The deposits are different, the gold is locked up in quartz and greenschist, which is a little harder material to work with, but it can produce gold. There is one project that's far ahead of everybody else, and then there are a couple that are still in the early phases.

TGR: Can you explain what your group at the USGS does? Do you promote mineral development in the U.S.?

MG: We are like a warehouse of information. A company could call me up and ask questions about what has happened in the past and why the price has gone up in the last few years. It could ask me questions, but we don't do anything to directly promote mineral development.

We produce the MCS, which gives a quick glance at what's going on today in the gold industry. The larger, more detailed Yearbook gives more of an overview of what happened during that year so you can see where development and production took place. It provides insight into why production was flat per se or why exploration has gone up. It gives a good basis to understand the industry during the past year.

TGR: Thank you for your insights.

The most up-to-date documents referenced in this interview can be accessed at http://minerals.usgs.gov/minerals/pubs/commodity/gold/index.html .

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In-Ground Low Grade Ore Supply is Staggering
.......USGS estimates that of all the gold in the earth's crust, 99.9998% is too dispersed to have ever been profitably mined, gold prices and extraction costs being what they've been thus far throughout history.

Thus, the great majority of all the gold ever mined has so far been confined to the most concentrated .0002% of the earth's gold. (The exception is roughly 15% of gold production which is recovered as a byproduct of other minerals' mining.)

Of course if the price of gold continues to rise to say $2,000 and beyond, miners will not be confined to just .0002% of the crustal gold. Lower grades of ore becoming profitable for the very first time might raise their opportunity, very conservatively, to say, .0005%.

Even such a tiny change would suggest potentially increasing the miners' in-ground gold Reserve Base by a stunning additional 150%. That works out to an extra 150,000 tons--an amount nearly equal to all of the gold ever mined.


In short, as the price of gold continues to reach new records, some portion of that other 99.9998% becomes increasingly available to miners.

Thus, there is more than ample gold in the ground to keep a lid on the price of gold in the long term, especially when you consider that gold's price rising in and of itself can transform already located poor grade worthless ore into profitable Reserves.

Recall that all the gold ever mined would fit in a cube roughly 65 feet to a side. Many, many, many times that amount remain in the earth's crust, and if humans want more badly enough, we can get it.

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DoChenRollingBearing said:

Great thread guys!

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ADK said:

Thanks for the interesting article, Unobtainum!

I've wondered, for quite a while, what the cost of production was for silver. I've just never got around to researching it.

Other than peak PMs, my curiosity is now piqued.

ADK

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Unobtanium said:

(...)Even such a tiny change would suggest potentially increasing the miners' in-ground gold Reserve Base by a stunning additional 150%. That works out to an extra 150,000 tons--an amount nearly equal to all of the gold ever mined.

In short, as the price of gold continues to reach new records, some portion of that other 99.9998% becomes increasingly available to miners.

Thus, there is more than ample gold in the ground to keep a lid on the price of gold in the long term, especially when you consider that gold's price rising in and of itself can transform already located poor grade worthless ore into profitable Reserves.

Recall that all the gold ever mined would fit in a cube roughly 65 feet to a side. Many, many, many times that amount remain in the earth's crust, and if humans want more badly enough, we can get it.

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bushi said:

Yeah, in terms of supply/demand, I think that if traders had ANY idea about what is going on in the real world, and that unlike technical analysis, charts, electrons, derivatives casino, "money for nothing" creation and talking heads world, there are very hard LIMITS of what we could possibly get from Earth - they should already killing each other over what' s left in non-renewable commodities. See what Chinese are doing...

Gold is but one of them, but similar charts can be drawn for almost anything today.

What is scary, and puts us on a direct crash course, is that our economic/monetary systems, (as of today), they require year-on-year exponential growth of economy - just to prevent them from collapsing. So, to be compatible with even TODAY's resource extraction rates, we would need technology to provide reverse-exponential upgrades in material usage, year on year. Can you imagine that each year, the stuff that we manufacture & consume, uses x% less and less base material & energy to manufacture (where x is equal to real GDP growth, to stay flat with base resource usage)? I mean, yes, it happens, we are getting more and more crap products for our money (heuristics in CPI, anyone? ), but hey, we simply cannot possibly keep the pace with consumption growth by cheapening the designs, at ever-increasing pace. And it wouldn't even reduce resource usage, only keep it at today's levels. (Example: let's assume you are world-only chair maker, and you HAVE to increase your production by x% yearly, to sustain world's economy, and you can only use 100 trees a year (=flat resource usage). So, you would need to use less and less timber per chair every year, and that would have to go DOWN exponentially, as reverse to your yearly production growth. Pretty soon, your timber content per chair would be close to zero. That is simply impossible in the real world.

Space mining... The only viable option, going forward? But is it possible at all? And the energy requirements for that to happened... My gosh.

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bushi said:

but benjamen, should such debasement ever "work" economically, I would be living as a king in Poland (actually, we all Poles would), haven't been emigrated, Russian empire wouldn't collapse, and I wouldn't be typing it, for I wouldn't be allowed the luxury of open communication from behind the Iron Curtain.

There is the real component of GDP growth, and there is monetary/inflationary component of it (caused by increasing money supply). The second one is a hidden tax/theft of capital, by government/CB. If inflating GDP by printing money could ever lead to anything else than destruction of an economy, well, that's all that we would ever need to do. But I haven't seen this implemented successfully, and I really struggle to call it anything but a nonsense. Besides, it is strongly inflationary, and there's no way around it.

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For example, one of the most popular mining trucks today costs a whopping $2.7 MILLION. Each tire costs $30,000... and the annual fuel costs run more than $1 million per truck!

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ancona said:

Bushi,
With gold around 15,000 dollars an ounce, it becomes economically viable to "mine" it from seawater. I read somewhere that the ocean contains a huge amount of gold, only it is too costly to extract. Given a high enough return on investment, it is economically viable to mine even tiny fractions of an ounce per ton of spoil.

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kjansen1969 said:

...
Second, we stop mining? What does that due to supply/demand. ...

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NEW GOLD SUPPLY FROM UNDER THE SEA
When the mention of recovering gold from the sea comes up, most people think of ancient lost treasures and sunken boats. While businesses do try to find and recover such lost amounts of old gold, it has now become risky business. A number of countries have exercised original ownership rights on found treasure by salvagers, with the U.S. government honoring the claims, seizing the lost gold, and turning it over to claimants (http://www.coinnews.net/2012/02/27/odysseys-black-swan-named-sunken-coin-treasure-lands-in-spain/).
However, another form of sea-borne recovery is now taking place with the high price of gold: actual sea-bed mining. Found in crags and clefts of the sea bed, natural gold deposits are the new gold miner’s frontier, as much as two miles under the sea surface. Countries, companies and well-funded private parties are now chasing underwater gold, particularly because of the current high price making the venture profitable (http://www.nytimes.com/2012/07/10/s...f-gold-and-other-ores-lure-seabed-miners.html). With new technology and equipment depths previous untouchable are now ripe for the picking.
A good portion of potential deposits are found along the South Pacific zone ranging from New Zealand and Tonga to Fiji and the Solomon Islands. This of course has attracted the national attention of countries like China and Japan. That said, deposits exist in many locations and in every ocean. The regulator of all this activity is a small United Nations outfit called the International Seabed Authority, which doles out permits for mineral rights and extraction.
Gold fans shouldn’t expect prices to suddenly fall from a new sea supply, however. It takes a lot of expense to get down that deep in the ocean, so miners will be looking for profit on the gold brought back up and sold.

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King World News
Aug 7, 2012

We’re Headed Into Massive Inflation & A Major Gold Spike
http://kingworldnews.com/kingworldn...o_Massive_Inflation_&_A_Major_Gold_Spike.html

.......
The Chinese accumulation of gold has been described as ‘relentless.’ But it was just reported that China has started shutting down a lot of their unsafe mines. They have just been mined out. The fact that China is shutting down a lot of mines just supports the reporting by KWN that the Chinese demand for gold is ‘insatiable.’

The Chinese are beginning to have problems procuring gold through their current mining activities, so this is highly supportive that they are in fact buying large amounts of gold in the open market. The fact is that the Chinese imports of gold have been going ballistic for some time now.

We can see they have been importing up to 100 tons of gold per month into China. Now we know why, because they are having trouble with production. We have seen an exponential increase in the amount of gold China has been importing.

So when you look at the fact that virtually no one in the West likes gold, but China is importing as much gold as they possibly can, you realize that gold is set up for a major spike at some point. .......

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Gold mining healthy?
Scott Wright - Zeal Intelligence | August 3, 2012
http://www.zealllc.com/2012/gmhlth.htm


Interestingly mine production had actually been on a pretty alarming decline for a large portion of our current secular bull. Many folks forget that it was just in 2008 that production volume had fallen to a 12-year low, and that the miners were producing a full 10m ounces less than what they were at this bull’s 2001 beginning.


Finally after many years of increased capex towards exploration, development, and overall upgrades to this industry’s infrastructure, 2009 delivered the first production increase in years. And a now-three-year-running increase is something to behold.


Since 2008 gold-mine production has experienced an average annual growth rate of a staggering 6%. And this is especially impressive considering the relatively static nature of mine production. Increasing output is not as simple as turning a dial on a factory floor, as it takes many years of development to build a new mine and/or increase capacity at an existing mine. And when you take the natural depletion cycle into account, this 6% growth rate is all the more impressive.


But though impressive, it doesn’t take a rocket scientist to realize that this recent production growth rate is unsustainable. In fact, some recent fundamental unveilings raise questions as to whether even the existing rate of production is sustainable over time.


One major tell on the inner workings of the gold-mining industry is exploration spending. Exploration spending is essential in feeding the pipeline of next-generation mines, those that will be built to replace the ones that are depleting. And depletion is of course accelerated on higher production volume like we are seeing today. Faster-depleting reserves lead to more pressure on the replenishment front, which naturally leads to the need for more exploration spending. It’s a simple formula!


As one can imagine, gold’s secular bull has spawned a huge increase in exploration spending. According to prominent research house Metals Economics Group (MEG), gold exploration spending had seen a whopping 400%+ increase from its 2002 low to 2008 (~$3.2b). And though there was a huge dip in 2009 as a ripple effect of the global economic crisis, spending has been strong and on the rise ever since. But has it been enough?


Provocatively there’s an alarming trend unfolding on the exploration-spending front that is likely to have a major fundamental effect on the gold market. MEG points out that while exploration spending hasn’t declined, there’s an interesting shift in the types of projects attracting the capex.


It notes that over the last few years only about a third of exploration spending has been directed towards greenfield (early-stage/generative) exploration, with the majority going towards brownfield (near-mine) exploration. Even more troubling than this historically-low ratio is the fact that this industry-wide shift hasn’t resulted in a proportionate increase in assets advancing through the development pipeline. Typically in brownfield work the availability of infrastructure allows for fast-track development, yet we aren’t seeing this.


On one hand I can see why the miners have become more risk-averse considering the state of the global economy. It’s definitely less risky to prove up reserves where positive mining economics are known to exist. But this trend will have consequences on the reserve-renewal front.


While miners will occasionally make big discoveries via brownfield efforts, for the most part the biggest discovery in a brownfield zone has already been made. In general the major multi-million-ounce discoveries that this industry needs in order to effectively renew reserves are a product of greenfield exploration. And this brownfield bias has led to a lack of major discoveries.


Interestingly there are a couple different ways we can put this lack of major discoveries into context. First is some fascinating intelligence from MEG’s latest study on gold-reserves replacement. According to this study, there have been 99 gold discoveries of significance (deposits containing 2m+ ounces) since 1997. MEG added up all the reserves, resources, and production from these discoveries as of the end of 2011. And assuming a 75% resource conversion rate and 90% production recovery rate, the total sum only had the potential to replace 56% of the gold mined during this timeframe.


As MEG’s data clearly implies, gold discoveries are not even close to keeping pace with mine production. There are of course numerous factors contributing to this revelation. But the one that likely trumps them all is the simple fact that large gold deposits are getting harder and harder to find.


As gold’s scarcity rears its face, miners must expand their exploration efforts. They must drill deeper, venture to places with rougher terrains, and enter borders that may be hostile to their endeavors. These conditions are characteristic of greenfield exploration, and are obviously much more costly than brownfield work. And this cost differential perhaps explains why spending is not where it needs to be on the greenfield front.


Drilling down on MEG’s study even more, this 56% replacement rate is likely well on the high side considering some very liberal assumptions. Even MEG acknowledges that the viability of this discovered gold is subject to a lot of variables that could hamper its mineability.


Economics is of course the biggest variable. Many of these deposits are of low-enough grade or high-enough geological complexity that their higher extraction and/or processing costs require a much higher gold price to be economical. If the price of gold retreats much, these reserves/resources would quickly lose their economic viability.


Geopolitical risk is also a major variable. There are numerous amazing deposits that have been discovered over the last decade that will likely never be mined due to their location. Miners are constantly thwarted by deep-pocketed environmentalists, unruly locals, over-regulation, and greedy governments.


So you see even though 99 major discoveries seems like a lot over a period of 15 years, in actuality it is nowhere near what is needed to replace the gold that is being mined. And if the major deposits at best are only able to replace just over half of production, I can only imagine how many smaller deposits need to be discovered to fill the gap.


Speaking of gap fillers, this MEG research got me wondering more about the world’s gold deposits. Wouldn’t it be nice to have a better understanding of the asset base that supports current and future production? And wouldn’t it be nice to have some intelligence on the biggest tier of gap fillers, those in the 1m- to 2m-ounce range?


Thankfully our friends at Natural Resource Holdings were in this same wonderment. So CEO Roy Sebag and his team actually took to the task of compiling this information! After painstaking research that likely took thousands of hours, NRH now has the most comprehensive database of the world’s large gold mines and deposits that I have ever seen. And its 2012 ranking offers an invaluable fundamental read on the world’s asset base of gold deposits.


As part of its research NRH identified 439 deposits throughout the world that currently contain over 1m ounces of resources (all categories). And in looking at this data, I was smacked by the reality of how scarce this precious metal really is. Of the tens of billions of dollars being spent just to find gold, there are only 439 deposits of meaningful size on the planet to show for it!


Interestingly in scrubbing up with MEG’s data NRH identifies 312 deposits that hold 2m ounces or more, which tells us that over two-thirds of the world’s largest deposits had been discovered more than 15 years ago. And of these 312 deposits, provocatively only 150 are currently being mined.


On one hand it can be seen as encouraging that there is a large pipeline of undeveloped major deposits for future use. But on the other hand it can be seen as disturbing that there are so many deposits, especially numerous over 15 years old, that haven’t found their way to production in the current market environment. The fact is many of these deposits will never see the bottom side of a shovel, for reasons discussed above and more.


Of the world’s 127 gold deposits in the 1m- to 2m-ounce range, 39 are currently being mined. Again it is encouraging to see so much potential for the next generation of mines. But I’m afraid the same variables of uncertainty will again prevent many of these deposits from ever coming online.


This NRH data also allows me to put into perspective the relevance of deposits in this 1m- to 2m-ounce range. Interestingly these 127 deposits hold a combined 181m ounces of resources. If all of these resources were converted to mineable reserves with a 100% recovery rate, this would only be enough to cover just over two years’ worth of mine production.


And to put deposits of this size into even more perspective, consider their average annual run rates. To be very conservative, let’s assume that these deposits are able to produce an average of 150k ounces per year. In such a case the 39 operating mines would combine to contribute only 5.9m ounces, which is less that 7% of total mined volume each year. While this next tier of deposit size seems large, in the grand scheme of things they collectively only make a small dent in the total supply. And this realization clearly shows the need for major deposits.


Per NRH, of the major deposits 33 hold greater than 20m ounces (19 in production), 41 hold between 10m to 20m ounces (24 in production), 74 hold between 5m to 10m ounces (40 in production), and 164 hold between 2m to 5m ounces (68 in production). Though this provides the gold-mining industry with an inventory of 162 major undeveloped deposits that have the potential to replace production and reserves, it’s just not enough.


And to make matters worse, there’s another prevailing trend that doesn’t bode well for the structural integrity of the mined gold supply. With much higher input costs and uncertainty with the global economy, many miners have been holding off on the development of their major deposits. Even if these deposits are economically viable with high rates of return, lenders and investors are hesitant to fund the $1b+ it would take to build a decent-sized mine.


So circling back around, is the gold-mining industry healthy? Unfortunately if you peel away the excitement of record production in recent years, I’d say no. Gold discoveries are not keeping pace with mine production, exploration spending trends are not conducive to finding major deposits, the inventory of large-sized deposits is thin, and development capex is harder to come by. The future looks bleak for reserve renewal and ultimately sustaining current production levels.

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So how is this deficit made up? Deficits are made up from central bank sales, stockpiles and scrap. Except
there is now a growing problem. First central bank sales have stopped and central banks have become
once again net buyers of gold. Central bank net sales largely came to an end in 2009. Since then central
banks have been net buyers of gold. In 2011 central banks purchased net 392 tonnes. In the first two
quarters of 2012 central bank net purchases totalled 162 tonnes. The prime buyers have been Russia,
Turkey, the Phillipines and Mexico. China is suspected to also have been a net buyer but their figures had
to be reported.

The other problem is that stockpiles are falling. Since 1950 the world has consumed some 110 thousand
tonnes. That is roughly 80% of all the gold ever found. Production has provided about 93 thousand
tonnes. The shortfall of 17,000 tonnes has come as noted from central bank sales, stockpiles and scrap.
However, that is now 17 thousand tonnes fewer available in the future to make up deficits. With central
bank sales having come to a stop it is left to dwindling stockpiles and hope that scrap makes up the
difference of over 1,600 tonnes annually. The 17,000 tonne shortfall since 1950 is equivalent at current
production rates to 7 years of production.

The question begs. Where is the additional supply going to come from? The conclusion is it appears to be
fairly straightforward that rising deficits requires higher gold prices in an attempt to attract more
production. Trouble is a major producer, South Africa, has been seeing declining production over the past
number of years including down 4% in 2011.

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Looking at Gold Price Trends
By Byron King Jul 17th, 2009
http://whiskeyandgunpowder.com/looking-at-gold-price-trends/

The first thing I do when I sit down at my desk in the morning is check the price of gold. The second thing I do is check the price of oil.

Sure, the price for gold and oil changes all the time. Prices go up and down, for good and bad reasons. Heck, sometimes prices fluctuate and the reasoning defies logic.

Still, I watch the price points. Deep down, I’m looking to see if the prices for gold and oil are following my long-term view of what ought to happen. That is, my long-term view is that both gold and oil prices are going to rise to astonishing heights.

Scarcity rules. That’s the foundation of my investment thesis. Today, I’ll explain my thinking about gold and leave oil for another time.

Reviewing the Gold Landscape

The first thing to understand, as an old geology professor at Harvard once told me, is that “gold is where you find it.” And the second thing to understand is that no matter where you look, gold is hard to find — and getting harder.

In the past decade, gold-related exploration efforts and expenditures have increased dramatically. I’ve seen numbers adding up to tens of billions of dollars poured by mining companies into gold exploration.

But despite the best efforts of the global mining industry, world gold production has DECREASED since early in this decade. Take a look at the chart below, depicting world gold production 1850-2008.

I Love This Chart

I love this chart. I could spend all day discussing it. For example, look at the very steep rise in gold output during the 1930s. That was during the depths of the worldwide Great Depression. In both the U.S./Canada (blue area), and the rest of the world (gray area), people were digging more and more gold. The Soviets (purple area) increased their gold output too, courtesy of Joseph Stalin and his Gulag. Desperate times call for desperate measures, I suppose. Will that sort of history repeat this time around?

Falling Gold Output, Plus Monetary Inflation

Or look at that massive run-up in gold output from South Africa (green area) in the 1950s and 1960s. That was during a time when South Africa was instituting its post-World War II system of apartheid. Labor was cheap (sorrowfully cheap), and quite a lot of international investment poured into South Africa without moral qualm. The South Africans dug deep and just plain tore into those gold-bearing reef structures of the Witwatersrand Basin.

But notice how quickly the South African gold output declined in the 1970s, as the mines got REALLY deep and the rest of the world began to institute sanctions against South Africa over its apartheid system.

And then look at the gold price run-up that followed in the late 1970s. It was a time of inflation, mainly coming from the U.S. dollar. Yet world gold mine output was dropping as well. Falling output, plus monetary inflation? The gold price skyrocketed. Another bit of useful history, right?

Recent History — the Trend Is Down

Now let’s focus on more recent history, since about 1990. There were large increases in gold output from the U.S./Canada (blue), Australia (gold) and Asia (China orange, non-China open bar). By 2000 or so — the world production peak — gold prices were down toward $300 per ounce and below.

But as the chart shows, in the past 10 years, gold output has shown a marked DECLINE in the major historic gold mining regions. The prolific gold output from the U.S./Canada, Australia and South Africa has followed downward trends. Sure, these regions still lift a lot of ore and pour a lot of melt. But the production trend is DOWN.

Why the downward trend? I suppose you could call it “Peak Gold,” but that term really doesn’t convey the explanation. Let’s highlight some of the reasons for the decline.

In North America, Australia and South Africa, people have been kicking the rocks for 100-150 years. The large deposits and the high-grade good stuff have been discovered. The ore that’s “easy” to mine has been mined. The deeper ore is more expensive to dig, lift and process.

And I have to mention that over time, the culture in so-called “developed” parts of the world has gotten greener. People and policy have turned against mining in the developed world. So mining doesn’t happen where it’s not appreciated.

The flip side is that if mining is declining in the developed world, then the future of gold mining must be growing in the developing world, right? Well, yes and no. Of course, it’s true that there are more rocks to kick and ore bodies to uncover in the underexplored regions of the world. But this leads to another problem.

Development Issues in the Developing World

The U.S./Canada, Australia and South Africa all have well-established and (more or less) workable mining laws — despite the best efforts of many current politicians and regulators to screw it all up. These historically producing areas are politically stable. Overall, there’s good mining infrastructure, with road and rail networks, power systems, refining plants, a vendor base, mining personnel and access to capital.

But that’s not the case in many areas of the developing parts of the world. Political stability? Security? Infrastructure? Transport? Power? Refining? Vendors? Personnel? Capital? Everywhere is different, of course. But overall, the entire process is much more problematic. So there’s a lot more risk. When you move away from the traditional mining jurisdictions, the whole process of exploration, development and mining is more expensive.

Thus, the new gold discoveries of the future are going to lack some (if not most, or perhaps all) of the advantages of the developed mining world. That means that the ore deposits of the future will have to offer much higher profit margins, based on size and ore grade, to compensate for the increased risks. Too bad Mother Nature (or Saint Barbara, who looks after miners) doesn’t work that way.

It also means the timeline to develop the mines of the future will likely be stretched over many years while political, legal, bureaucratic, logistical and social issues are ironed out.

Future Gold Output on a Downward Trend

The key driver for the future of worldwide gold supply will be DECLINING output overall over time. Coupled with monetary inflation, you can expect to see MUCH HIGHER GOLD PRICES.

The gold that does come up will be from more distant locales, and deeper levels, or it will be more costly to process from lower-grade ores. The whole gold mining cycle will get more expensive and more risky.

Big Miners Scrambling

Some of the big gold miners — Newmont, for example — are already in a constant, squirrel cage scramble to replace their reserves lost to annual production. Newmont simply cannot grow organically. Newmont can’t “discover” enough new gold resources on its own every year. It doesn’t even try.

Newmont has a reputation within the mining business that it’s being run by accountants, not mining engineers. So the Newmont strategy is simply to go out and “mine gold on Wall Street,” so to speak. If Newmont needs reserves, the company buys a smaller miner. Indeed, Newmont has laid off most of its formerly world-class exploration department. Its in-house geologists spend much of their time looking at other peoples’ mines.

New Deposits Are Out There

There’s a strong exploration and development incentive built into all of this for smaller firms. The current business climate for gold mining has spurred the creation of many small companies that are generating prospects. The players within the industry are smart, hungry junior exploration companies.

The owners and operators of these companies, and their ilk, are bringing new ideas to the mining districts of the world. And despite the ups and downs of the daily gold price, the best of them will have their day. We just have to pick the sharpest, best-run firms… and be patient as history unfolds.

Until we meet again,
Byron W. King

July 17, 2009

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