so here we go - some of the costs of stuff that goes as "input" for miners. This stuff is very likely to only go up in price in case of shrinking supply (resource depletion), pushing either required ore quality OR price/OZ upwards, for miners to stay profitable.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!
Unfortunately, most of those estimates assume only gold skyrocketed in USD price. In reality, if gold is that high it most likely means high inflation. Therefore, how much would oil, wages, and other mining expenses also skyrocket?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.
http://goldtrustfinancial.com/my_news/new-gold-supply-from-under-the-sea/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.
King World News
Aug 7, 2012
We’re Headed Into Massive Inflation & A Major Gold Spike
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. .......
Gold mining healthy?
Scott Wright - Zeal Intelligence | August 3, 2012
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.
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.
Looking at Gold Price Trends
By Byron King Jul 17th, 2009
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