by Brent Cook
The mining industry is producing 89 million ounces of gold per year but only finding about a third of that amount each year. Mining companies have passed the point of peak new gold discoveries, and only manage to stay in business by exploiting deposits discovered tens of years ago. Major gold miners now face an imminent and very real deficit of economic deposits—deposits needed to replace the gold being produced from mines that are long in the tooth and running dry.
The upside for investors in the minerals exploration sector is that mining companies will become increasingly desperate for new economic discoveries and will pay a premium for the deposits that will actually make money. We need only to identify those deposits early on and hold them. The key, of course, is to single out the very few legitimate deposits from the hundreds of marginal or uneconomic ones being touted by the hundreds of junior mining companies.
The preceding chart titled “Peak Gold” follows from comments Goldcorp CEO Chuck Jeannes has made during presentations and as reported by the Wall Street Journal. Jeannes points out that miners have reached peak production. His explanation: easy to mine deposits are being depleted while also becoming harder to find. The chart does not factor in additional declines in production that will occur if the gold price stays low for any extended period of time.
Most of those easy to mine deposits were found in the mid-90s and have taken 10 to 20 years to come into full production. The increase in discoveries 20 years ago was largely the result of previously off-limits countries opening up to modern exploration; basically, low hanging fruit became available. The decline in ounces discovered started about 1995 because the number of obvious, outcropping, ore bodies was finite. However, as the discovery chart points out, and even if we include new ounces not yet defined or reported, the exploration industry has not kept up with production. Significantly, new ounces discovered have declined despite increased exploration expenditures, a feature that supports my contention that we have in fact reached peak “economic” discovery.
The problem is not really that Earth is running out of gold—there are 20 million tons of gold in seawater and 20 million ounces at Livengood in Alaska, alone. The problem lies in recovering those ounces profitably. Seawater grades 13 parts per trillion and Livengood grades about 0.6 parts per million. Without a very substantial real increase in the gold price (an increase that is not accompanied by a similar rise in mining and capital costs) most of the currently defined resources will remain uneconomic or marginal.
Further, as companies cut all-in operating costs by increasing the mined grade (high grading), curtailing development, postponing maintenance, and slashing exploration, production will inevitably decline. These near term cost saving exercises often gut the economic reserves thereby rendering previously defined ore uneconomic—hence Peak Gold Production.
You know where I am going with this. . .
Mining is a depleting business. For every ounce or pound produced, a mining company’s assets (reserves) decline. We all know this. The big dilemma for most mining companies is that they are facing a new type of shareholder, one that expects a profit now. Therefore, nearly every activity (cost) that is associated with building its future business is being curtailed, both to satisfy the market and in an attempt to ensure survival during current low metal prices.
Exploration is always the easiest expenditure to cut, as in the eyes of the accountants it is purely a cost center populated by a bunch of unruly and unkempt geologists throwing money down holes. A fair enough assessment, given the very poor odds of success and the fact that, over time, successful exploration has become increasingly more difficult and expensive. MinEx Consulting estimates that the industry as a whole spends about ~$150 million per gold discovery.
As pointed out above, the near surface, easily mineable deposits have been exploited for decades now, and the discovery of a new, near surface deposit is a very rare event indeed. Additionally, the hurdles to exploiting any new deposit have increased almost exponentially due to the social, political, environmental, and permitting realties across the globe. Consequently, even the successful discovery of easily mineable deposits will cost more than ever and take substantial time to develop. For example, the Pebble copper/gold deposit in Alaska was first identified in 1988 and explored by various companies until 2005 when the Deep Pebble East deposit was discovered. The project is still battling through the permitting process after spending $730 million, and it may still never get built.
Because of the limited number of outcropping deposits left, large new discoveries are being increasingly made at depth, under significant and usually barren cover, as illustrated in figure 3 below. By having to look deeper, basic exploration costs are much higher, and the odds of making an economic deposit much lower. What could previously be mapped and sampled in detail by a geologist with a rock pick at surface now takes obscure geophysical techniques and drilling: drilling that only provides information for a 3-inch diameter string of core.
One also has to face the geological facts and recognize that for every 2 gram per tonne gold occurrence, there are roughly ten 1 gram per tonne occurrences (that’s just how Earth works). Therefore, you are more likely to find low-grade uneconomic deposits at depth than high-grade ones; yet the economic hurdles associated with deeper deposits require discovery of the higher-grade deposits. The odds of economic success are destined to get worse no matter how much is spent looking.
The only logical conclusion I can draw from the predicted decline in production and documented decrease in new economic discoveries is that some day in the future, permitable and profitable deposits will be very valuable—more so than they are today. Buy intelligently and buy early.
That’s the way I see it.
Economic Geologist and Author Exploration Insights.
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