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Is This The Real Golden State?

Golden State

Major gold companies are running out of reserves and every year it costs more to mine. That is causing an “existential crisis” for the gold mining industry, as executives at gold producers like Barrick, Newmont Goldcorp, Randgold, AngloGold Ashanti, Newcrest and Kinross, puzzle over how to replace their depleted reserves, where new gold will come from, and how they will deal with the rising costs of extraction. 

At the PDAC conference in Toronto this year, Mark Ferguson, head of mining studies at S&P Global Intelligence, shared data suggesting the industry is indeed running out of gold ore to mine. 

“Clearly the industry did very well in the 1990s and even through 2008. But since then there’s been a dearth of new big deposits (discovered), and … there is going to be a shortfall in new gold discoveries,” Ferguson told conference-goers in March. 

Reserves depletion

A 2018 report from S&P found that, as a group, 20 major gold producers had to cut their remaining years of production by five years, from 20 to 15, based on falling reserves. Moreover, gold grades have been declining since 2012, meaning more ore has to be blasted, crushed, moved and processed, to get the same amount of gold as when the grades were higher, significantly adding to costs per tonne. 

It’s not surprising that gold companies are finding it tougher to add to reserves. The fact is, all of the easy, low-hanging fruit has been picked. Even with a six-fold increase in exploration spending between 2002 and 2012, there has been a significant dearth of new discoveries.

According to McKinsey, in the 1970s, ‘80s and ‘90s, the gold industry found at least one +50 Moz gold deposit and at least ten +30 Moz deposits. However, since 2000, no deposits of this size have been found, and very few 15 Moz deposits.

Any new deposits will cost much more to discover. This is because they are in far-flung or dangerous locations, in orebodies that are technically very challenging, such as deep underground veins or refractory ore, or so far off the beaten path as to require the building of new infrastructure from scratch, at great expense.

The costs of mining this gold may simply be too high.

Add to this the practice of high-grading where, instead of mining a deposit as it should be, economically, by extracting, blending both low-grade and high-grade ore at a given strip ratio of waste rock to ore – the company “high-grades” the orebody by taking only the best ore, leaving the rest in the ground.

The implication of high-grading is a dramatic improvement in a company's margins, but at a huge loss of ounces to its reserve base, as well as lowering the deposit’s average grade, since all the best material has been removed.

According to McKinsey, in 2016, about 60% of gold operations were mining with mill grades above the mine’s reserve grade – in other words, they were high-grading. Large mines where this was occurring included Goldfields’ Granny Smith mine in Australia, Goldcorp’s Cerro Negro, Argentina and Barrick’s Turquoise Ridge operation in Nevada.

In sum, the combination of high-grading, which lowers both reserves and grades, a drastic reduction in new discoveries due to a lack of exploration spending, and decreased mine lives, means the industry will be extremely challenged to maintain current production levels. According to a background report, by 2020 global mine production is expected to drop 3% to 95 million ounces and keep falling after that – in other words – we have hit peak gold. The report estimates that by 2025 production will be one-third lower than 2020’s output.

Peak gold 

The concept of “peak gold” should be familiar to most gold investors. Like peak oil, it refers to the point when gold production is no longer growing, as it has been, by 1.8% a year, for over 100 years. It’s stopped growing because existing mines are getting depleted without enough new gold deposits to replace them.

Since reaching “peak gold” in the mid-2000s, six major gold miners experienced declines in production. According to Bloomberg Intelligence data on the big producers, combined gold reserves shrank by almost half in 2018, to 406 million ounces, due to exploration budget cuts.

The 10 largest gold mines operating since 2009 will produce 54% of the gold as a decade ago - 226 tonnes versus 419 tonnes.

No wonder, then, that for gold miners to grow, they need to “eat each other”. They require big gold mines, and the only options out there are existing mines run by their competition. If you can’t beat ‘em, join ‘em.

None of this is news to gold companies. But it is good background to explain recent mega-mergers and joint ventures - the Barrick-Newmont combination in Nevada, and the fusing of Newmont and Goldcorp - along with other examples of gold mining M&A.

Barrick’s problem, and solution

Why did Barrick want to partner with Newmont, its competition in Nevada where the two gold giants have been finding and pumping ounces out of the Carlin Trend for decades? 

It all comes down to the need to replace reserves and cut costs. At the end of the first quarter, Barrick’s gold reserves had declined from 64.4 million ounces to 62.3Moz. The company explained its reserves declined mostly due to depletion at its Cortez Hills open-pit mine, and changes at its mine in Tanzania. 

Initially Barrick, which in January 2019 acquired South Africa’s Randgold, tried a hostile takeover for Newmont valued at a whopping $18 billion. 

Barrick’s CEO, Mark Bristow told shareholders he could get $7 billion in synergies over the next two decades, through cost savings realized by combining operations. Newmont has 19 mines in Nevada, many adjacent to Barrick’s. 

However when Newmont, which in April 2019 gobbled up Canada’s Goldcorp, rejected the offer, Barrick focused on the prize: Nevada. 

Instead of fighting Newmont for a set pile of gold in Nevada, why not join forces with its rival to ensure that Barrick remains the largest gold company in the world? 

In July Newmont and Barrick established a new joint venture partnership, Nevada Gold Mines LLC, 61.5% owned and operated by Barrick, and 38.5% belonging to Newmont Goldcorp. The JV makes Nevada Gold Mines the largest producing gold complex on Earth. Its northeastern Nevada assets include 10 underground and 12 open-pit mines, plus autoclave, roasting and heap leach facilities that in 2018 produced 4.1 million gold ounces - double that of the next largest gold mine, Muruntau in Uzbekistan. 

The joint venture, with proven and probable reserves of 48.3 million ounces, is expected to produce 1.8 to 1.9 million ounces per year. Synergies from combined operations, including the merger of Turquoise Ridge and Twin Creeks into one mine, are targeted at $500 million annually, starting in 2020.

The JV will also help Barrick to shed an estimated $1.5 billion by divesting its less-productive mines, while it looks to acquire new assets. 

JV success

It didn’t take long for Nevada Gold Mines to find exploration success on its home turf. Last month Barrick hit a discovery hole just north of its Fourmile project. The new orebody increases the strike length of the Goldrush-Fourmile trend to 6 kilometers, and opens the potential for adding one more Tier 1 asset to the three already wrapped into the Nevada Gold Mines partnership - Goldstrike/Carlin, Cortez and Turquoise Ridge/Twin Creeks - by combining Fourmile with the nearby Goldrush development.

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“Discovery is fundamental to value creation and the latest results from Fourmile confirm the potential for further high-value discoveries in the greater Cortez – Carlin region which has been a prolific source of gold discovery and production for 150 years, and still holds an untapped wealth of geological endowment,” Barrick’s Bristow said in a news release


With 160 years of gold mining that dates back to the Comstock Lode discovery in 1859, Nevada has been, and still is, one of the best jurisdictions to find gold. 

In 1849, Mormon ‘49ers on their way to California discovered placer gold in a stream that flowed into the Carson River, near the current town of Dayton. As mining lore recounts, the ‘49ers led a mining party upstream into what became known as the Virginia Range. Ten years later, hard-scrabble miners found the first croppings of the Comstock Lode. It’s intriguing to think that, if it wasn’t for the ‘49ers camping and panning in Nevada on their way to the California Gold Rush, the millions of ounces sitting underground could still be undiscovered. 

While the Comstock Lode sparked a frenzy of silver mining in Nevada (it was the first major silver find in the United States), it took over 100 years for the state to become gold-famous. 

The discovery of microscopic gold on the Carlin Trend prompted Newmont to start operations there, in the early 1960s. At the time, reserves were pegged at a mere million ounces, but by 2016, the Carlin had given up 88.2 Moz in cumulative production, “assuring its place as one of the most productive gold-mining districts in the world,” states a report from the Nevada Division of Minerals. 

Between 1835 and 2016, Nevada produced a phenomenal 158 million ounces. This is more than any other gold rush, including California’s, which extracted about $2 billion in precious metals from 1849-62, and the Comstock era, 1860 to 1875, which mined around 34 Moz, according to research by The Nevada Sun. Nevada currently produces around 80% of all the gold in the United States. 

Impressive as these numbers are, junior gold investors sometimes overlook Nevada, thinking that all the precious metal has been found - not so. While the western state certainly has been well-explored and mined, there is still huge exploration potential remaining for multi-million-ounce discoveries, especially around the edges and in the depths of existing or past-producing gold mines and trends. 

The United States’ primary gold producer has an impressive geological endowment. According to the US Geological Survey, if Nevada were a country, it would be among the world’s top four producers. The Nevada Bureau of Mines and Geology tallied gold reserves in 2015 at about 70 million ounces, enough to sustain gold production near current levels for 12 to 15 years. 

Nearly every rock type known to geologists is found within its desert geography, though silver and gold have been the most prevalent. The state owes its unique geology to the northern Great Basin which features a number of mountain ranges and valleys where the rocks below have been smashed together and pulled apart through tectonic activity dating back millions of years.

Most of Nevada’s gold deposits are found within three northwest-trending belts. The most famous is the Carlin Trend, where sedimentary, disseminated gold appears near surface, often surrounded by smaller deposits of similar geology. 

Estimated to contain up to 180 million ounces, the Carlin Trend is the second largest gold endowment behind South Africa’s Witwatersrand Basin. The three major players operating mines in the Carlin Trend are Newmont Mining, Barrick Gold and Kinross Gold. Barrick’s Goldstrike mine is one of the world’s most prolific. Between the Betze-Post open-pit mine and the Meikle and Rodeo underground mines, the Goldstrike mines have produced over 1.1 million ounces and have 8.1 million ounces of reserves.

Newmont’s Carlin operations have produced 944,000 ounces out of 15 million ounces in reserves. Kinross’s Bald Mountain mine, purchased from Barrick in 2016, outputted 130,144 gold-equivalent ounces, with 2.1 Moz in reserves.

The other two trends, Battle Mountain-Eureka-Cortez (or just Cortez) and Walker Lane, also host some of the world’s most important gold mines, including SSR Mining’s Marigold mine in Humboldt County and McEwen Mining’s Gold Bar operation - the latter producing 482,815 ounces of gold between 1986 and 1995.

The three major trends feature Carlin-style mineralization, but Nevada also has epithermal, low-sulfidation gold deposits. While generally smaller than the large Carlin-type deposits, epithermal vein-type deposits, which are not unique to Nevada, are often high grade, making them excellent targets for gold exploration companies.

In 2018, from Nevada’s 5.8 million ounces, the top three producing gold mines were Barrick’s Cortez Hills OP/ Pipeline, at 974,391 ounces, Newmont’s Carlin Trend operations, which mined 971,613 oz, and Barrick’s Betze Post mine which outputted 458,287 oz. Barrick's 2.425 Moz out-paced Newmont’s 1.8 Moz, followed by Kinross at 660,100 oz and SSR Mining at 205,161 oz. 

Nevada’s mines also crank out a lot of silver, in 2018 producing 8.011 million ounces of the white metal.  

Interest in Nevada has increased significantly since Barrick Gold and Newmont Mining started discussing their expansion strategy in Nevada, and their recent partnership has really heated up the market for all properties in the gold state, specifically interest in drill programs to discover and develop new ounces for the larger market-cap producers.

By Richard Mills 

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