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All Gold in the Ground is Not Created Equal Part Two - 5 years later

The first article written Five years ago needs updating as a lot has changed. To avoid a lot of repetition, the link to the old poorly written piece is here: http://www.safehaven.com/showarticle.cfm?id=790.

The determinants for an uneconomic, vs. a marginally economic, vs. a really attractive gold deposit, are still few, simple, and as always, readily apparent. IF one has a realistic perspective on the fundamental economics of the industry. Most importantly, with this round of metals price increases, come dramatic energy and raw material price jumps, along with labor and other operating costs. These energy, equipment, and labor costs, make many of the low grade deposits acquired by the junior companies marginal, and likely will require metal prices to exceed the $500 level, to be economic. The less energy intensive high grade underground operations will now be producing some more attractive numbers over the large low grade high volume operations.

What has also become apparent is the equity market's pricing of the ounces in the ground being sometimes quite distorted for various reasons. Perhaps irrational exuberance may apply? One crucial issue is the SEC policy of only allowing the use of historic metal prices for reporting reserves. It seems obvious that at this juncture, these prices are much to low. Once these market inefficiencies are understood, opportunities arise to exploit the sometimes uninformed, or in fact irrational inefficient market pricing.

A really great tool for determining a gold company's market cap per Oz of reserve ratio ($/Oz) has long been available, on the Mineweb site. I believe it was initiated some years ago by a really great data miner, Tim Wood, who now has his own shop. The list of companies with "Ore Reserves" is well maintained and transparent, with the companies' market cap / Oz reserve ratio for Proven and Probable reserve estimates in the far right column. Wonderfully, the user is able to reorder the column from alphabetical to numerical ranking, by double clicking a column heading. The link to the list is here, and if you misplace it, you will have to dig for it by going to the Mineweb home page, and on the top left vertical menu list, click on the "minewebdata", and then "watchlist", when it comes up. http://mineweb.iac.iafrica.com/pls/cms/new_watchlist.Open_NewForm?order_item=mark_pnp

Go to the watchlist and reorder the Market Cap to reserves ratio from alphabetical to numerical. The five most expensive companies are at the bottom. Goldcorp is at $850 an Oz, Glencairn over $1,000, Meridian over $800, etc. A friend commented that Goldcorp should go buy truckloads of Maple Leaf One Oz coins and drop them down the shaft, as the coins were worth more coming up than going down. Serious analysis requires the backing out of their almost $500,000,000 of cash, which is increasing at the rate of about $400,000,000 a year, through their production of 1.0 Million Oz/Yr. at cash cost of about $50, (pre tax, which is their BIG problem). Then one must consider the Silver Wheaton holding worth >$500,000,000 and kicking off free cash flow. Notice the market has both ABX, and NEM at about the same level. Apparently ignoring Barricks off balance hedge book loss of almost a Billion! The other firms on the list can be handled in the same manner. Some are dramatically over priced, some about right and some under. Have fun.

There are two types of gold companies. Those with Proven Un-Developed, (PUD), deposits, and those with the CAPEX sunk for Proven Developed Producing, (PDP), assets. On the watchlist, double clicking on the two columns for Mktcap/PP, and Production, reorders both columns. Now the fun starts! How do I make a buck off the mispricing inefficiencies of Mr. Market?

We had originally included the always difficult, and sometimes fatally destructive issue of Political Risk into Environmental costs, but now it is imperative to consider that political risk category separately, as it has been, and can be in the future, absolutely fatal to a company and an individual deposit. With this background, we can now have a look at the cost per Oz of categories.

Finding Costs

The range of finding costs still varies by a huge margin from the low of under $5 per oz, to infinity, where the exploration dollars are completely misspent and lost on a geo-fantasy. There are still examples of deposits that have changed hands several times over the years, still being drilled and promoted all over again, and will NEVER EVER have any production. Why the analysts fall for this is incomprehensible! Or maybe it is easily understood?

An important generic number to know is the all in costs of exploration. The driller gets about half, and the assayer, geologist and G & A, the remainder. Currently, reverse circulation drilling costs about $20/ ft, or $66 a meter and core drilling is about double that. Drillers in this booming market, have almost total pricing power, and thus can pass on the costs of fuel and labor.

A great example of a new well-known geo-fantasy really going well is the multimillion Oz Placer Dome deposit on the Cortez trend in Nevada. Placer Dome states that their recent finding costs have been under $20 / Oz, depending on the various factors used to determine the contained ounces.

An example of note is the El Sauzal deposit that Francisco drilled up and sold to Glamis which is now in production. As the deposit was without road access during the first round of drilling, core rigs were brought in by helicopter, and then the road was built. The remoteness of the location escalated costs, so the end cost for bankable reserve drilling was about $20,000,000 for what was Two million Oz's, and has now been expanded to almost Three million. The finding cost was a little under $10 an Oz, and required approximately 100,000 ft of drilling. The Dolores deposit of Minefinders is another good example. Here a slightly higher finding cost was incurred as so much if the drilling was deep core drilling. Nevertheless, the deposit is a bit over Three million Oz of gold and silver equivalent, for about 250-300,000 ft of drilling.

Last time I looked, the Ocampo deposit which is now under construction just north of El Sauzal, had a little over 200,000 ft of drilling for a little over Two Million Oz, combined open pit and underground, Ten dollars again. These are good current examples of stand alone deposits.

A VERY important distinction must be made between the amount of drilling for a large lower grade open pit, as opposed to a smallish or large structurally controlled open pit, and an underground structure, or vein. We always look at the finding rate of Ounces found per foot of drilling for a determination of the risk reward ratio after the discovery is made. The Three million Oz in the Mulatos deposit had about 550,000 ft of drilling, open pit disseminated, about .03 Oz / Ton, for 5.45 Oz / ft. Barricks new Laguna Norte also has 550,000 ft of drilling for 9.1 Million Oz, and as the grade is .066 Oz/Ton, and the deposit is a bit more compact, the finding rate is about 16 Oz / ft. The El Sauzal math comes out to about 20 Oz / Ft, as the grade is about .10 Oz / Ton. Clear illustration again for certain, the truth of there is no substitute for grade.

It would be very interesting to know what the Oz / Ft of the Goldcorp 1- 2 Oz per Ton fabulous reserve was before the mill was restarted after drilling.

Capital Cost

We will stay with the easy examples above, as the numbers are well known and cast in stone. El Sauzal cost $100,000,000 for the 5,500 T / Day open pit warm weather milling operation in Mexico. New road, not to long, and Glamis engineers bring these things in on time and on budget, as usual. Going to the upside of the range, 3 Million Oz, the CAPEX is thus $33 / Oz. The escalation in costs up to the $18,000 per daily ton is a current reliable bench mark for this size and type of plant.

Minefinders Dolores project is $131 Million for 18,000 T/Day, or $7,277 per daily Ton. Using the mineable diluted recoverable round number of 3.0 M. Oz of gold and silver equivalent, is $43 per Oz.

Barricks Laguna Norte is to be $340,000,000 for the valley fill heap leach at 42,205 T / day, 8.9 Million T / Yr, and the waste ore ratio less than 1/1. The cost is right at the current level one would expect for a large remote heap leach of $8,055 per daily ton of capacity. The $340 Million for the 9 Million Oz's is $37.70 per Oz. The Alamos Mulatos deposit is right where one would expect also, at $70,000,000 for 10,000 T/Day, or $7,000 per daily ton, with oversized crushers and plant for moving to 20,000 T/Day. There is a recent example of a smaller heap leach in Mexico priced at about half these numbers, which makes it quite unbelievable, thus illustrating the value of knowing these current benchmark prices.

Without really difficult factors for the site specific issues, the range of costs now for heap leaches is as above, $6 - $8,000 per daily ton. Milling operations is about $20,000 a daily ton, up from $10-15,000. Depending on the site specifics, an underground operation would no doubt be about $50,000 / daily ton, or more.

Cash Costs

Barrick's numbers for Laguna Norte are Mining = $1.73, Processing = $1.25, and G & A = .94. Total = $3.92 / Ton. The cash cost per Ounce is expected to be $120. Really big deal here is the waste ore ratio is less than 1/1, and this is a run of mine valley fill heap leach, with no crushing costs. Since they have been doing one of these at Pierina for the last several years, this is a known modus operandi for them. Obviously good metallurgy for the run of mine rock with good continuity for really easy mining for the high volume big equipment.

The good silver credit at Dolores drops the gold cash cost down to almost $100, which is an off set for the remote location and three stage crushing. Credits are a great bonus, whether silver, or copper, its just money.

I am unable to dig out the detailed costs breakdowns from Glamis operations, as for some reason they are not at all transparent in reporting their details. Interested parties should prod them for us please. The well known number for their historic run of mine heap leaches has been $2.50 - $4.0 / Ton. One quarter when the San Martin grade went UP to One gram, .03 Oz/T, the cash cost dropped to $80 / Oz. The generic operating cost number for an El Sauzal style milling operation at the 5,500 T/day rate was always $8-10 / Ton. With diesel and other costs escalations, it could now be $11 - $12 now, with the advertised cash cost per Ounce for El Sauzal at $125, plus or minus, per Oz. The site specifics of fly in fly out labor, power generation on site, and stripping ratios can have an impact that can be significant.

Underground operations can vary so widely in cost that it is really hard to get a break out from any specific operation, as mining method can cause costs to vary widely. Blast hole stopping at $6 - $10, to narrow cut and fill at $40 - $70 gives an idea of the range. A number that comes up frequently from actual mature underground operations in several locations that have been verified is $30 / Ton, for reasonable widths, reasonable ground conditions, not to deep, etc.

An important issue for some of the underground deposits is the refractory metallurgy that requires autoclaves, like the monsters Barrick and Newmont have been running for years at Carlin, or the fluid bed roasters at Jerritt Canyon, or the Emperor mine in Fiji. Autoclave costs WERE about $13-14 a Ton, before the energy price lift off, and will now be about $15-20. Both ABX and NEM have announced small power plant construction at Carlin in Nevada to lower power costs, probably by selling excess output into the system.

The Jerritt Canyon costs are a good example of an underground, cut and fill, with a fluid bed roaster. Mining = $30-35, Mill = $23, including $16 for fluid bed roaster with oxygen plant. The Pre Production capital to develop the new pods of ore is $10, so all in costs are $60-80, equivalent to a mineable, diluted recoverable grade of about .16 Oz/T. At .32 Oz/T the required margin is in place, but at .20 - .25 Oz/T, things get skinny. Management has decided to reduce volume by reducing costs by mining higher grade at lower volume for these higher gold prices. Is this really a good idea?

Current numbers for contractor mining for two decent size heap leach projects in Central America are $1.00 to $1.25 for both ore and waste, including blasting, of 17 cents. For any heap leach, the process costs will be about the same as Barrick's in Peru, $1.25, and the G & A will be about $1.00.

Environmental / Reclamation Costs

This number can vary so much from site to site, and country to country that it is impossible to generalize.

When Kinross bought Echo Bay I always wondered what the reclamation costs HAD to be on the balance sheet, and if there was sufficient cash in escrow at Echo Bay to cover the reclamation at Round Mountain and McCoy Cove. Two really huge open pits. Round Mountain alone has moved over 500,000,000 tons. If one were to assume a number that has been mentioned of Twenty Five cents per ton then the bill is $100,000,000. The old Sleeper mine site had a bond of about Twelve Million, and the lake that is the old pit is now a park. The junior that took the deal over on drill potential has been fighting the problem there for years. I have not cared to check the status for some time.

The trials and travails at Magalia's Cerro San Pedro deposit in Mexico demonstrates that despite time and money spent doing everything properly, setbacks can still occur when locals, pushed by the environmental NGO's try to kill a well done project with money well spent, irrational fears and innuendo.

Political Risk Cost

Examples of this really deadly cost of near, and or total destruction are regretfully becoming more numerous. Manhattan's Tambo Grande in Peru is always a prime example. The original old test case for the NGO's in British Columbia was a sophisticated effort of very smart, well organized, very well funded greenies killing the Windy Craggy mine years ago. Written up in National Geographic, and sent around the world.

The long running tragic comic opera example of Gabriel's deal in Romania, under attack by Greenpeace and friends, and the machinations of the national government towards Crystallex in Venezuela, and others are fair warning to the unwary and naïve of the industry.

The Meridian Gold Esquel deposit in Venezuela comes to mind, as it may well never be developed. Here is the sort of well organized attack that can come to destroy a good deposit. www.nodirtygold.org/pubs/20030324PRintl_EsquelReject.pdf

The NGO's ability to organize 200 people from the local population in Peru, transport them to a remote site and, physically attack the workers at a development site with sticks and machetes, is instructive of the power of the NGO's to organize the local population, even in remote areas.

The NGO's have managed to cancel some of the exploration rights in Honduras, are on the attack in Nicaragua, and are hot and heavy on Glamis new Central America mine with very aggressive tactics. So far the company is dealing with the problem as well as possible.

We believe it is vital that the industry become VERY proactive, very early in the exploration process, and deal with the local authorities closely.

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