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Color Outside the Lines

As a general rule, the most successful man in life is the man who has the best information.

Mining is an extremely capital intensive business for two reasons. Firstly mining has a large, up front layout of construction capital called Capex - the costs associated with the development and construction of open-pit and underground mines. There are often other company built infrastructure assets like roads, railways, bridges, power generating stations and seaports to facilitate extraction and shipping of ore and concentrate.

Capex costs are escalating because:

  • Declining ore grades means a much larger relative scale of required mining and milling operations
  • A growing proportion of mining projects are in remote areas of developing economies where there's little to no existing infrastructure

There is also continuously rising Opex, or operational expenditures, to consider. These are the day to day costs of operation; rubber tires, wages, fuel, camp costs for employees etc.

The bottom line? It is becoming increasingly expensive to bring new mines on line and run them.

The reasons behind flat-lining gold production, and record cash and all-in costs, are numerous:

  • Production declines in mature mining areas
  • Slower than expected ramp-ups of output
  • Development time up
  • The entire resource extraction industry suffers from a lack of skilled people
  • Extreme weather
  • Labor strikes
  • Protests
  • Increasingly more remote and lacking in infrastructure projects
  • Higher capex costs
  • Increased resource nationalism
  • Increased environmental regulation
  • More complex metallurgy
  • Lower cutoff grades

In 1998 the world's top two highest grade mines were SMM's Hishikari Mine in Japan @ 50g/t and Barrick's Meikle mine in the U.S. @ 32g/t. In 2011 the world's top two highest grade mines were Newcrest's Gosowong in Indonesia @ 25g/t and goldcorp's Red Lake mine in Canada @ 24g/t.

In 2014 Klondex Mines Fire Creek Mine in the U.S. was the world's highest grade mine @ 44g/t and coming in second place was Kirkland Lakes Macassa Mine in Canada @ 22g/t. Declining mined and mineable gold grade is a direct result of the industry's inability to discover new high grade/high margin deposits.

Goldman Sachs Eugene King published a report earlier this year (2015) warning of Peak gold. Since gold production lags discoveries by around 20 years the following chart suggests he may be right.

Peak Gold Production

Here's some excellent insight from Brent Cook, explorationinsights.com.

"Major gold mining companies are facing a big problem. They are unable to find and develop enough ounces to keep up with demand, for the simple fact that economic gold deposits are extremely rare."

There are three main reasons why gold production increased up to 2000 despite declining gold prices.

  • The first is the advent of new mining and processing technologies that made previously uneconomic low grade deposits economic. This was mostly a result of heap leach technology and bulk mining methods. Meaning, mining companies could now scrape up large areas of low grade mineralization and sprinkle a cheap solution of cyanide on the rock to recover the gold. This primarily worked on near surface oxidized deposits in relatively dry climates.
  • The second is that vast regions of the world that had previously been closed for various reasons were opened up to exploration. These new areas include much of Latin America, Africa, and the former Soviet Union.
  • The third is that geologists had a whole slew of new exploration tools with which to scan the earth. These include satellite imagery, geophysics, and more sensitive chemical tools.

The net result was that new technologies kept old deposits going longer and made previously uneconomic ones viable, thereby ramping up production into the early 90's. New deposits in previously unexplored and off-limits areas kept that production going until about 2000. All well and good but the industry is not finding as many new deposits as they need to in order to maintain current production levels. And, although we can expect incremental technological improvements in processing, mining, and exploration, there is nothing revolutionary on the horizon.

This is a worrisome slide for major gold producers -- they are unable to sustain themselves. For the most part they are surviving via old deposits that are running out of ore and newer deposits that are quickly headed into the "old" deposit category. Reserves from these aging deposits are not being replaced by new discoveries. Producers' problems are further exacerbated by rising exploration and development costs, plus the significant time it now takes to permit and finance a new deposit."

Gold Reserve Replacement

Here's Paul van Eeden (paulvaneeden.com) on reserve replacement,this was written in 2001:

"Worldwide gold production from mining is approximately 80 million ounces per year. A few years ago, a world-class gold discovery, which rarely occurs, would have been anything over a million ounces. Perhaps a few such deposits are discovered in a decade yet we mine the equivalent of 80 such deposits a year...

This from Natural Resource Holdings, 2013 Global Gold Mine & Deposit Rankings; "The gold mining industry needs to discover 80 million ounces of gold every year just to prevent it from shrinking and it is highly unlikely that we will ever discover 80 million ounces in any given year, never mind do so on a continuous basis."

"There are only 580 mines and deposits on earth with over 1 million troy ounces of in-situ gold with less than 200 in North America... we are nearing peak gold production as the total in-situ ounces when adjusted for metallurgical recoveries and average mine life are about 50% less than what is required to maintain the current production trends.

The average grade of all producing mines is 1.18 g/t Au, which is 32.6% higher than the average of all projects still in the development phase (0.89 g/t Au). This has significant implications on future gold production. In the near term, with significant volatility and the gold price at a three-year low, many of these projects are simply not economically feasible." Natural Resource Holdings, 2013 Global Gold Mine & Deposit Rankings

In their 2013 report Natural Resource Holdings identifies 3.72 billion below ground ounces of gold. You have to ask; what's actually recoverable?

Have we reached Peak Gold?

Gold production Set to Decline

"Goldcorp estimates that global production will drop six per cent in the next three years, and almost 18 per cent in the next nine years. This may seem mind-boggling to the casual investor who watched hundreds of gold companies pop out of the woodwork during the bull market from 2000 to 2011. But it speaks to the numerous challenges facing the sector. There has been a shortage of new discoveries in the past decade, leaving the industry's pipeline relatively bare. At the same time, companies have been deferring or canceling projects because the execution risk is just too high. That is due to soaring construction and operating costs, political risk, permitting challenges and numerous other factors.

And of course, gold prices have plunged almost 40 per cent in the past three years. That accelerated the move to the production cliff because miners have been forced to shelve many big projects. They have also focused on higher-grade ores at their mines, which means their reserves and mine lives are shrinking fast.

The production cliff puts the senior gold miners in a precarious position. The not-so-secret problem with these firms is that their current production rates are not sustainable for very long. They have a couple of uncomfortable options: let production decline, or go on an acquisition frenzy to fill up their project pipelines. And those options are complicated by the excessive debts that many of them are carrying." For many miners, there's no avoiding the gold 'production cliff' now, Peter Koven, Financial Post

Time From Discovery to Gold Production

"Over the past 24 years, mining companies discovered 1.66 billion ounces of gold in 217 major gold discoveries, SNL Metals & Mining's 2014 edition of Strategies for Gold Reserves Replacement shows.

While that sounds like a significant amount of gold, it falls short of the 1.84 billion ounces produced over the same period. In addition, the amount of gold discovered and the number of major discoveries (defined as any deposit with a minimum of 2 million ounces of contained gold) have been trending downward over time, from 1.1 billion ounces in 124 deposits discovered during the 1990s to only 605 million ounces in 93 deposits discovered since 2000.

The amount of potential production from these major discoveries is particularly concerning when looking at the discoveries made in the past 15 years. Assuming a 75% rate for converting resources to economic reserves and a 90% recovery rate during ore processing, the 674 million ounces of gold discovered since 1999 could eventually replace just 50% of the gold produced during the same period.

However, considering that only a third of the discovered gold has been upgraded to reserves or has already been produced, and that many of these deposits face significant political, environmental or economic hurdles, the amount of gold becoming available for production in the near term is certainly much less." Kevin Murphy, Fewer discoveries, slower development weigh on gold industry, Mining.com

Better than Gold

Gold's price has risen because of the abuse and mismanagement of our monetary and currency systems - throughout history, gold has always shone the brightest when trust breaks down, confidence falls and fear climbs. Which sounds exactly like today, wars, plague, economic collapse, central banks money printing out of control and the bad news rolls on an on.

Gold is up about four times from its lows more than a decade and a half ago. What's the upside from here?

If gold hits $5000.00 an ounce it's more than a quadruple from here. You've got a nice return and it's this authors belief that gold and silver bullion and coins should be part of every investors portfolio.


History shows us, time and again, the greatest leverage to gold's rising price is owning gold exploration/development junior mining stocks.

Will mainstream investors eventually catch on to the fact they need to own both gold and gold shares? The buying of shares in companies involved in the search for and development of gold projects is an imperative to garner the coming golden rewards.

"I am amazed by how nervous more and more Investors or shall I say Gold traders are becoming. Every Bull Market must always climb a wall of worry and this market will be no different. Since so many of you seem to be wavering between whether you should become short term traders or stay as long term investors, perhaps a refresher course in making money and a little bit of hand holding may be the order of the day.

While a few succeeded by trading commodity futures; stock options, day trading or short selling. Jesse Livermore, the most famous of the short sellers who caught the top in 1929, nevertheless died broke. After a great deal of study and research it finally sunk in that most of them that achieved their ultimate goals were those individuals who identified a major Bull Market or an individual stock and RODE it for all it was worth. They bought and held during both the pleasurable upswings as well as through the sharp, terrifying down drafts, during which times they all took advantage of the down drafts to accumulate more stock. Then, when the Bull Market appeared to be in its final, frothy stage, they gradually sold their holdings to the late comers (who Joe Granville named the Bag Holders), who's blind greed had them clamoring to get in at the top." Aubie Baltin

Gold juniors are going to be the most rewarding, the most lucrative way to garner the huge rewards from the coming freight train rush to gold. Those golden tracks are being laid today using the world's fiat currencies as ballast - when your cash is trash your gold is shining.

There will be fierce merger and acquisition (M&A) competition for the juniors with stable safe gold ounces in the ground by producers having to replace their reserves in an extremely competitive environment. As we've seen there aren't very many decent sized deposits, ones over one million ounces, left in politically stable countries.

Junior resource companies, not majors, own the worlds future mines and juniors are the ones most adept at finding these future mines. They already own, and find more of, what the world's larger mining companies need to replace reserves and grow their asset base.

If I was looking for superior investment vehicles to take advantage of what I think I know regarding precious metals I'd be assembling a portfolio of juniors with sizeable deposits in the post discovery resource definition stage with the occasional green field exploration play thrown into the mix.


Colouring Outside The Lines

Gold, and gold mining stocks, are not currently getting a lot of love from investors. Perhaps it's time for you to color outside the lines a bit, give group think a huge doubt and take some advice from the Baron?

Baron Nathan Rothschild became a legend during the financial crisis right after the Franco-Prussian War. As the story goes, a panic-stricken investor came screaming into his office yelling, "You advise me to buy securities now? Now? The streets of Paris run with blood!" Rothschild replied, "My dear friend, if the streets of Paris were not running with blood, do you think you would be able to buy at the present prices? Buy when there's blood in the streets, even if the blood is your own."

Is coloring outside the lines and getting ahead of the herd on your radar screen?

If they aren't, they should be.


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