Are we running out of major gold mines?

The World Is Running out of Gold Mines—Here’s How Investors Can Play It

By Frank Holmes – CEO and Chief Investment Officer U.S. Global Investors

the world is running out of gold mines, here's how investors can play it

My good friend Pierre Lassonde, cofounder and chairman of Franco-Nevada, doesn’t know how we’ll replace the massive gold deposits of the past 130 years or so. Speaking with the German financial newspaper Finanz und Wirtschaft this month, Pierre says we’re seeing a significant slowdown in the number of large deposits being discovered. Legendary goldfields such as South Africa’s Witwatersrand Basin, Nevada’s Carlin Trend and Australia’s Super Pit—all nearing the end of their lifecycles—could very well be a thing of the past.

Over the medium and long-term, this could lead to a supply-demand imbalance and ultimately put strong upward pressure on the price of gold.

According to Pierre:

If you look back to the 70s, 80s and 90s, in every one of those decades, the industry found at least one 50+ million ounce gold deposit, at least ten 30+ million ounce deposits and countless 5 to 10 million ounce deposits. But if you look at the last 15 years, we found no 50 million ounce deposit, no 30 million ounce deposit and only very few 15 million ounce deposits. 

So few new large mines are being discovered today, Pierre says, mostly because companies have had to slash exploration budgets in response to lower gold prices. Earlier this year, S&P Global Market Intelligence reported that total exploration budgets for companies involved in mining nonferrous metals fell for the fourth straight year in 2016. Budgets dropped to $6.9 billion, the lowest point in 11 years. Although we’ve seen an increase in spending so far this year, it still dramatically trails the 2012 heyday.

Total nonferrous exploration budgets fell to an 11 year low in 2016
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And because it takes seven years on average for a new mine to begin producing—thanks to feasibility studies, project approvals and other impediments—output could recede even more rapidly in the years to come.

“It doesn’t really matter what the gold price will do in the next few years,” Pierre says. “Production is coming off, and that means the upward pressure on the gold price could be very intense.”

Have We Reached Peak Gold?
Frank Holmes standing next to Pierre Lassonde right at Mines and Money London in December 2015

What Pierre is talking about, of course, is the idea of “peak gold.” I wrote about this last year and suggested another factor that could be curtailing new discoveries—namely, the low-hanging fruit has likely already been picked. Gold is both scarce and finite—one of the main reasons why it’s so highly valued—and explorers are now having to dig deeper and venture farther into more extreme environments to find economically viable deposits.

Other factors contributing to the decline include tougher regulations and higher production costs. And unlike with the oil industry, no “fracking” method has been invented yet to extract gold from hard-to-reach areas, though Barrick—the world’s largest producer by output—has been experimenting with sensors at its Cortez project in Nevada.

Take a look at how drastically annual output has fallen in South Africa, once the world’s top gold-producing country by far. In the 1880s, it was the discovery of gold in South Africa’s prolific Witwatersrand Basin—responsible for more than 40 percent of all gold ever mined in human history, if you can believe it—that helped transform Johannesburg into one of the world’s largest and most populous cities. Today, South Africa’s economy is the most advanced and stable in Sub-Saharan Africa, all thanks to the yellow metal.

In 1970, miners dug up more than 1,000 metric tons—an unfathomably large amount. Since then, production has steadily dropped. No longer in the top spot, South Africa produced only 167.1 tons in 2016, an 83 percent plunge from the 1970 peak. Meanwhile, miners in the notorious Mponeng mine—already the world’s deepest at 2.5 miles—continue to follow veins even deeper into the earth at greater and greater expense.

South Africa's gold output has been in steady decline for more than 45 years
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Australia could soon be seeing a similar downturn over the next four decades. A first-of-its-kind study conducted by MinEx Consulting and released this month, shows that Australia’s gold production is expected to see a significant drop between now and 2057. By then, all but four of the 71 currently operating mines in the country will be exhausted. Most of these will close in the next couple of decades. Any additional production will be dependent on new exploration success, which will become increasingly difficult if companies don’t invest in exploration and if the Australian government doesn’t relax rules in the mining space.

MinEx estimates that “for the Australian gold industry to maintain production at current levels in the longer term, it will either need to double the amount spent on exploration or double its discovery performance.”

To be fair, large discoveries haven’t disappeared entirely. Back in March it was reported that Shandong Gold Group, China’s second-largest producer, uncovered a deposit in eastern China containing between 380 and 550 metric tons of the yellow metal. If true, this would make it the country’s largest ever by amount. The mine has an estimated lifespan of 40 years once operations begin.

In addition, Kitco reports this month that Toronto-based Seabridge Gold recently stumbled upon a significant goldfield in northern British Columbia. The find appeared, coincidentally, after a glacier retreated. It’s estimated to contain a whopping 780 metric tons.

“There’s no question that as glaciers retreat, more ground will become available for exploration and more discoveries could be made in that part of the world,” Seabridge CEO Rudi Fronk told Kitco.

The company already has the permits to begin mining.

Seabridge gold is up 15 percent for the three month period
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Exploration Budgets Jumped
Gold represents over half of global annual commodities exploration budgets

As I said earlier, we just saw an encouraging spike in the amount spent on exploration. According to S&P Global Market Intelligence, exploration budgets increased in the 12-month period as of September for the first time since 2012. Budgets jumped 14 percent year-over-year to $7.95 billion, with gold explorers leading the way. During this period, gold companies spent around $4 billion on exploration, which is roughly half the value of all nonferrous metals mining budgets.

But because exploration is getting more expensive for reasons addressed earlier, senior producers might very well decide instead to acquire smaller firms with proven, profitable projects.

This could create a lot of value for investors, so I would keep my eyes on juniors that look like targets for takeover. Dealmaking in the Australian mining industry, for example, is showing some growth this year compared to last, according to a September report by accounting firm BDO. Last year, Goldcorp finalized its deal to acquire Vancouver-based junior Kaminak Gold, and in May of this year, El Dorado announced it was taking over Integra Gold for C$590 million. I expect to see even more deals in the coming months.

In the meantime, I agree with my friend Pierre’s “absolute rule” that investors should hold between 5 and 10 percent gold in your portfolio. I would also add gold stocks to the mix, especially overlooked and undervalued names, and rebalance once and twice a year.

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Has the new-mined gold output crunch already begun?

Frank Holmes, CEO and Chief Investment Officer of US Global Investors, talks us through whether we have  yet reached Peak Gold production and the price implications for the precious metal if indeed we have.

Goldcorp CEO Chuck Jeannes called 2015 the eyar for peak gold, citing the lack of new major gold discoveries. Do the facts line up with his predictions?

Gold is one of the rarest elements in the world, making up roughly 0.003 parts per million of the earth’s crust. (For some perspective, one part per million, when converted into time, is equivalent to one minute in two years. Gold is even rarer than that.) If we took all the gold ever mined—all 186,000 tonnes, from the bullion at Fort Knox to India’s bridal jewelry to King Tut’s burial mask—and melted it down to a 20.5 meter-sided cube, it would fit snugly within the confines of an Olympic-size swimming pool.

The yellow metal’s rarity, of course, is one of the main reasons why it’s so highly valued across the globe and, for most of recorded history, recognized and used as currency. Unlike fiat money, of which we can always print more, there’s only so much recoverable gold in the world. And despite the best efforts of alchemists, we can’t recreate its unique chemistry in a lab. The only way for us to acquire more is to dig.

But for how much longer?

Goldman Sachs analyst Eugene King took a stab at answering this question last year, estimating we have only “20 years of known mineable reserves of gold.”

The operative word here is “known.” If King’s projection turns out to be accurate, and the last “known” gold nugget is exhumed from the earth in 2035, that won’t necessarily spell the end of gold mining. Exploration will surely continue as it always has—though at a much higher cost.

(In fact, our insatiable pursuit of gold might one day soon take us to space, as President Barack Obama signed legislation in November that permits commercial mineral extraction on asteroids and the moon. Many near-Earth asteroids are said to contain trillions of dollars’ worth of precious metals and other minerals. But that’s a discussion for another time.)

We’ll probably see a surge in mergers and acquisitions, as I told Kitco News’ Daniela Cambone last week. I think that as long as they have reliable output, mid-cap companies could be gobbled up by the Barricks and Newmonts of the world.

Another consequence of recovering the last known nugget? The gold price could spike dramatically to levels only imagined. My colleague Jim Rickards, in his book “The New Case for Gold,” puts it at $10,000 an ounce. GoldMoney founder James Turk says it’s closer to $12,000. There’s really no way of knowing how high gold could go.

Did Gold Production Peak in 2015?

What we do know is that global gold output has been contracting since 2013. Last year might have been the tipping point, however, in line with Goldcorp CEO Chuck Jeannes’ prediction that peak gold was within spitting distance.

“There are just not that many new mines being found and developed,” he told the Wall Street Journal in 2014, adding that this was “very positive” for the gold price going forward.

This year, second-quarter mine supply was 2 percent less than the same period in 2015, according to preliminary estimates made by Thomson Reuters GFMS. Some analysts now expect global production to fall 3 percent in 2016, after seven straight years of growth.

world quarterly mine production is trending down
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What’s more, few new projects and expansions are expected to come online this year, writes Thomson Reuters, “and those in the near-term pipeline are generally fairly modest in scale, hence our view that global mine supply is set to begin a multiyear downtrend in 2016.”

Indeed, if we look at projects that opened in just the last two or three years, we see that they’re of lower grade, meaning they don’t produce nearly as much as older, easy-to-mine gold deposits.

new mines are making small contributions to global gold production
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The truth of the matter is, when it comes to discovering new gold deposits, the low-hanging fruit has likely already been picked. Gone are the days when someone could stumble upon an exposed hunk of gold at the bottom of a riverbed, as James Marshall did in 1848, setting off the California Gold Rush. Every year, the pursuit of gold becomes increasingly more challenging—not to mention more expensive—requiring ever more sophisticated tools and technology, including 3D seismic imaging, directional drilling and airborne gravimetry. (A satisfactory “gold fracking” method, however, seems unlikely to become reality any time soon.)

Compounding the issue is the fact that the number of years between discovery of a new major deposit and production is widening, due to the increase in feasibility assessments, compliance, licenses and more—and that’s all before nugget one can be extracted. The average lead time for gold mines worldwide is close to 20 years, though it can sometimes be more, depending on the jurisdiction. This highlights the need for worldwide policy reform to remove many of the barriers that obstruct responsible mining.

number of years between deposit discovery and production is growing
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In The Goldwatcher, the book I co-wrote with John Katz, I expressed the importance of knowing which developmental stage of a mine’s lifecycle a project currently falls into, as this has a strong influence on stock performance. Investing, like life, is all about managing expectations.

lifecycle of a mine
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Few New Mines as Companies Deleverage

What all of this means is we’ll probably continue to see fewer and fewer major discoveries, or those that yield more than a million ounces. As you can see below, new gold discoveries peaked in 1995. Exploration spending peaked nearly 20 years later when the price per ounce averaged $1,600.

Where Have All the Gold Discoveries Gone
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With gold now trading above $1,340 an ounce, up 26 percent for the year, many investors expect producers to begin lifting spending on exploration and production (or dividends).

Instead, most companies are in cost-cutting mode, using this opportunity to pay down debt and liquidate assets. According to Reuters, North American gold producers have managed to lower their debt levels 30 percent since late 2014.

Speaking to Mining.com, Newmont Mining CEO Gary Goldberg said his company, the second-largest gold producer in the world, is one of the few that’s currently building new mines—specifically the Merian project in Suriname and Long Canyon in Nevada. Because of the lack of new mines being built, he sees supply falling 7 percent between now and 2021.

Demand for the yellow metal, on the other hand, should remain strong during this period, helping to support prices even more.

Massive Inflows into Gold Funds

Daily Percent Change Following Positive Jobs Report

In the meantime, gold continues to find support from global monetary policy and low to negative government bond yields. Last week the Bank of England cut rates as part of a stimulus package, which both weakened the British pound 1.5 percent and gave the yellow metal a jolt.

These gains were erased, however, following Friday’s better-than-expected U.S. jobs report, which sparked a rally in Treasuries. This contributes to the narrative that gold and government debt are inversely related, a key component of the Fear Trade.

When priced in the local currencies of the U.S., Canada, South Africa or Australia—four of the largest gold-producing countries—bullion is up, which has boosted miners’ profits. Gold stocks, as measured by the NYSE Arca Gold Miners Index, have appreciated 128.92 percent in the last 12 months.

Gold Priced in Local Currencies
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For the first half of 2016, inflows into commodities have been the strongest since 2009. Gold and other precious metals account for about 60 percent of the new money, which has pushed commodity assets under management above $235 billion. Barclays believes 2016 could be the best year on record for gold-related ETFs and other funds, with many big-name hedge fund managers, from Stan Druckenmiller to Paul Singer to Bill Gross, singing the praises of the yellow metal.

 

Junior Focus: Rye Patch Gold and Kootenay Silver

From time to time LawrieOnGold is invited to meet with miners and explorers who are London-based, or who are travelling through the city usually as part of a capital raising exercise.  This week we had meetings with two interesting Canadian junior precious metals explorers – both at different stages in their development – Rye Patch and Kootenay Silver.

Rye Patch Gold Corp – TSXV: RPM; OTCQX: RPMGF

Particularly interesting near development stage gold explorer with all its prospects in Nevada, U.S.A.  Interesting in that through some smart research picked up licences on the Oreana and Cortez trends, in what is currently one of the most prolific gold production areas in the world, which had been allowed to lapse by major precious metals miners Coeur Mining and Barrick Gold.  The former was ground around Coeur’s big Rochester silver mine which is now generating significant royalties for the junior, which is enabling it to finance its exploration work on the two precious metals trends without eating into its cash reserves in any significant way.  The latest quarterly payment from Coeur totalled $1.85 million – sufficient to maintain a significant drilling programme on Rye Patch’s other highly prospective properties.

Most advanced is primary drilling activity to confirm and add value to its Lincoln Hill gold/silver project on the Oreana trend, relatively close to the Rochester mine.  This is an ultra low grade project but with good potential financials given the orebody is at surface (mine strip ratio is put at 0.5:1)and the material is easily heap leachable.  An initial Preliminary Economic Assessment suggested that a $750 gold pit shell and heap leach operation could be set up for a capital cost of only $30 million, giving the project a 5-year life, but with payback in only 1.3 years pre-tax  with an IRR of 76.5%.  At a higher gold price this pit shell is easily expandable, and there are also satellite prospects within 1-2 km which could also see a good extension to mine life, although these are yet to be drill tested.  The company’s proposed development schedule here is to proceed carefully with initial production only planned for early 2019.  See more detailed article on Mineweb: Junior gold explorer only spending what it earns.

But perhaps the sites with the highest longer term  potential are on the highly productive Cortez trend, with one area completely surrounded by Barrick Gold property and another to the south of the Barrick holdings between it and McEwen Mining’s Tonkin Springs project.  The Cortez trend includes the most productive Nevada gold mining operations after the Carlin trend and one of the Rye Patch areas borders on Barrick’s Goldrush and Goldrush South projects – which represent probably the biggest Greenfield gold discovery in the past five years.  Rye Patch’s other main prospect here is a short distance further south, but still between the Goldrsush properties and McEwen Mining’s Tonkin Springs project.

Thus Rye patch is an explorer with cashflow, a significant development project and additional highly prospective ground on two major Nevada gold and silver trends.  A great combination.

Kootenay Silver – TSXV:KTN

This is an earlier stage silver explorer with its prime properties in Mexico’s Sonora State in the country’s northwest and in an area already hosting several other gold and silver producing mines.  It was initially focusing on its Promontorio property – a promising large resource but perhaps not quite viable at current silver prices.  But exploring in the surrounding area it has outlined what it describes as a potential ‘game changer’ for Kootenay in the La Negra  greenfields discovery – a large, decent grade deposit offering low cost open pit heap leach potential some 6kms from its initial Promontorio prospect.  The company also controls a large land area with some other highly prospective drill targets.

At La Negra, Kootenay initially released the results of 25 drill holes which confirmed high grade silver mineralisation from surface down to around 100m.  A further 5 holes in its Phase 2 drilling programme are confirming the initial results.  But additionally the company’s geologists reckon that what they have found is the surface showing of a diatreme pipe which has the prospect also of hosting even higher grades at depth – a similar system , perhaps not in size, to Goldcorp’s Penasquito mine and Silver Standard’s Pitarilla project, also both in Mexico.

While it is early days yet for Kootenay its programme is to continue with its Phase 2 drill programme and come up with a detailed resource assessment later this year with a view to add value and perhaps find a partner to develop what could be a highly profitable project.  Much will depend on the silver price though and should the price rise significantly, as some believe it will, that could also bring the original Promontorio project into play too where Kootenay has outlined a silver equivalent resource (the deposit also contains zinc, lead and gold)  of some 92 million ounces Measured and Indicated and 24 million ounces inferred.  Not to mention, of course, other highly prospective targets in and among its big land holdings.  But as with most junior explorers the company has to strike a balance between ongoing expenditures and its cash balances and capital raising prospects – no easy task in the current depressed environment for precious metals juniors.

 

China’s largest gold miner buys into Pretium

Zijin Mining is to take a 9.9% strategic stake in Canada’s Pretium, developer of the exciting high grade Brucejack project.

Author: Lawrence Williams

LONDON (MINEWEB) –

Zijin Mining, one of China’s biggest mining companies (it is the country’s largest gold producer, second largest copper producer, and a significant zinc, tungsten and iron ore producer) is to take a 9.9% ‘strategic’ stake in Canada’s Pretium Resources (TSX: PVG), developer of the ultra high grade Brucejack gold project in British Columbia. Pretium has agreed to issue to Zijin, by way of a private placement, 12,836,826 common shares of the company at a price of Can$6.30/share to raise approximately $80.9 million. Once the transaction is completed – expected in January – Zijin will be entitled to a seat on the Pretium board.

Pretium said, in a statement, that the amount to be raised through the offering would provide a significant portion of the planned equity component of the financing required to bring the Brucejack Project into production. It intends to use the proceeds to fund capital expenditures including the procurement of long-lead items and camp infrastructure.

Pretium’s Brucejack project is perhaps Canada’s most exciting new gold project by virtue of the remarkable high grade gold intersections the company has delineated by drilling on the deposit.  Many of the Pretium drill cores have to be seen to be believed given the amount of visible gold which is evident!  The high grades are within a much lower grade matrix but even so the average resource grades are impressive……………

To read full article on Mineweb click here