Best of the Week
Most Popular
1. Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - Nadeem_Walayat
2.Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - James Burgess
3.Gold Price Trend Analysis - - Nadeem_Walayatt
4.The Beginning of the End of the Dollar - Richard_Mills
5.Stock Market Trend Forecast Update - - Nadeem_Walayat
6.Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - Troy_Bombardia
7.Precious Metals Sector: It’s 2013 All Over Again - P_Radomski_CFA
8.Central Banks Have Gone Rogue, Putting Us All at Risk - Ellen_Brown
9.Gold Stocks Forced Capitulation - Zeal_LLC
10.The Post Bubble Market Contraction Thesis Receives Validation - Plunger
Last 7 days
Palladium Shortages Expose Broken Futures Markets for Precious Metals - 9th Dec 18
Is an Inverted Yield Curve Bullish for Gold? - 9th Dec 18
Rising US Home Prices and Falling Sales - 8th Dec 18
Choosing Who the Autonomous Car Should Kill - 8th Dec 18
Stocks Selloff Boosting Gold - 8th Dec 18
Will Weak US Dollar Save Gold? - 7th Dec 18
This Is the End of Trump’s Economic Sugar High - 7th Dec 18
US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - 7th Dec 18
The Secret Weapon for Getting America 5G Ready - 7th Dec 18
These Oil Stocks Are a Ticking Time Bomb - 7th Dec 18
How Theresa May Put Britain on the Path Towards BrExit Civil War - 7th Dec 18
How easy is it to find a job in the UK iGaming industry? - 6th Dec 18
Curry's vs Jessops - Buying an Olympus TG-5 Tough Camera - 5th Dec 18
Yield Curve Harbinger of Stock Market Doom - 5th Dec 18
Stock Market Crashed While the Yield Curve Inverted - 5th Dec 18
Global Economic Outlook after Trump-Xi Trade War Timeout - 5th Dec 18
Stock Market Dow Plunge Following Fake US - China Trade War Truce - 5th Dec 18
Subverting BREXIT - British People vs Parliament Risks Revolution - 5th Dec 18
Profit from the Global Cannabis Boom by Investing in the Beverage Industry - 4th Dec 18
MP's Vote UK Government Behaving like a Dictatorship, in Contempt of Parliament - 4th Dec 18
Isn't It Amazing How The Fed Controls The Stock Market? - 4th Dec 18
Best Christmas LED String and Projector Lights for 2018 - Review - 4th Dec 18
The "Special 38" Markets You Should Trade ebook - 4th Dec 18
Subverting BrExit - AG Confirms May Backstop Deal Means UK Can NEVER LEAVE the EU! - 3rd Dec 18
The Bottled Water Bamboozle - 3rd Dec 18
Crude Oil After November’s Declines - 3rd Dec 18
Global Economic Perceptions Are Shifting - Asia China Markets Risks - 3rd Dec 18
Weekly Charts and Update on Equity Markets, FX Trades and Commodities - 3rd Dec 18
TICK TOCK, Counting Down to the Next Recession - 3rd Dec 18
Stock Market Key (Short-term) Support Holds - 3rd Dec 18
Stocks Bull Market Tops Are a Process - 3rd Dec 18
More Late-cycle Signs for the Stock Market and What’s Next - 3rd Dec 18
A Post-Powell View of USD, S&P 500 and Gold - 2nd Dec 18
Elliott Wave: SPX Decision Time Is Coming Soon - 2nd Dec 18
Junior Gold Stocks Q3’18 Fundamentals - 1st Dec 18
Little-Known BDC Stocks Thrive Amid Rising Rates and Earn Investors +7% Yields - 1st Dec 18
Ray Dalio: This Debt Cycle Will End Soon - 1st Dec 18
Bank of England Warns UK House Prices 30% BrExit Crash! - 1st Dec 18
Gold Fundamentals Improving but Not Bullish Yet - 30th Nov 18
What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - 30th Nov 18
Global Economic Perceptions Are Shifting Imnplications for Stock Market - 30th Nov 18
The US Economy is Getting Worse. What this Means for Stocks - 30th Nov 18
Trailblazers Leading the Way in Online Reputation Management - 30th Nov 18
The Shift in Trend from Physical Printers to Online Printers - 30th Nov 18
UK House Prices 2019 No Deal BrExit 30% Crash Warning! - 30th Nov 18
Stocks Rallied, New Uptrend? - 29th Nov 18
The Fed Will Probably Stop Hiking Rates in 2019. What’s Next for Stocks - 29th Nov 18
Love. Fear. Inflation. A Precious Metals' Trifecta - 29th Nov 18
GBP/USD – Double Bottom or Further Declines? - 29th Nov 18
Stock Market Santa Rally Still a GO to Dow 27,000? - 29th Nov 18
UK Government and Bank of England BrExit Economic Armageddon Propaganda - 29th Nov 18
Why the Crude Oil Price Collapsed to $50 - 28th Nov 18
Gold Joins the Decline – the Earth is Shaking - 28th Nov 18
Watch This Picture As Asset Prices Fall - 28th Nov 18
GE’s Stock Price Crash Holds an Important Lesson About Investing - 28th Nov 18
5 Rules for Successful Trading - 28th Nov 18
Dollar Trend Imposes: EURUSD to Fall to 1.11 - 28th Nov 18
Gold, Original Money, Fiat Money - 28th Nov 18
When Will the Stocks Bull Market End? - 28th Nov 18
Looking ahead: Why the Smart Money is Investing in Green Energy - 28th Nov 18
The Yield Curve Will Invert Soon. What’s Next for the Stock Market - 27th Nov 18
Silver Trading and the Hands of a Broken Clock - 27th Nov 18
What's Inside SMIGGLE Christmas Advent Calender 2018 - 27th Nov 18
Investing in Recession Proof Trailer Parks - 27th Nov 18
The Advantages and Disadvantages of Debt Consolidation - 27th Nov 18
GDX, This Most-Hated Stock Could Return You 140% in Just a Few Months - 27th Nov 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

Is Gold Mining Healthy?

Commodities / Gold & Silver Stocks Aug 03, 2012 - 11:54 AM GMT

By: Zeal_LLC

Commodities

Best Financial Markets Analysis ArticleIn 2011 gold-mine production came in at an all-time record high.  And in 2012 experts anticipate production to be even higher, edging above the previous year’s 87m-ounce tally.  From the looks of it, the major source of gold’s supply is in fine fettle.  But is the gold-mining industry truly healthy?

In attempting to answer this question it is important to understand how we got to the production levels we’re at today, and then take a look at some of the structural fundamentals that may impact this industry going forward.  And in terms of how we got here, it was nothing short of remarkable.


Interestingly mine production had actually been on a pretty alarming decline for a large portion of our current secular bull.  Many folks forget that it was just in 2008 that production volume had fallen to a 12-year low, and that the miners were producing a full 10m ounces less than what they were at this bull’s 2001 beginning.

Finally after many years of increased capex towards exploration, development, and overall upgrades to this industry’s infrastructure, 2009 delivered the first production increase in years.  And a now-three-year-running increase is something to behold.

Since 2008 gold-mine production has experienced an average annual growth rate of a staggering 6%.  And this is especially impressive considering the relatively static nature of mine production.  Increasing output is not as simple as turning a dial on a factory floor, as it takes many years of development to build a new mine and/or increase capacity at an existing mine.  And when you take the natural depletion cycle into account, this 6% growth rate is all the more impressive.  A lot of big new mines and expansion projects have come online in the last few years!

But though impressive, it doesn’t take a rocket scientist to realize that this recent production growth rate is unsustainable.  In fact, some recent fundamental unveilings raise questions as to whether even the existing rate of production is sustainable over time.

One major tell on the inner workings of the gold-mining industry is exploration spending.  Exploration spending is essential in feeding the pipeline of next-generation mines, those that will be built to replace the ones that are depleting.  And depletion is of course accelerated on higher production volume like we are seeing today.  Faster-depleting reserves lead to more pressure on the replenishment front, which naturally leads to the need for more exploration spending.  It’s a simple formula!

As one can imagine, gold’s secular bull has spawned a huge increase in exploration spending.  According to prominent research house Metals Economics Group (MEG), gold exploration spending had seen a whopping 400%+ increase from its 2002 low to 2008 (~$3.2b).  And though there was a huge dip in 2009 as a ripple effect of the global economic crisis, spending has been strong and on the rise ever since.  But has it been enough?

Provocatively there’s an alarming trend unfolding on the exploration-spending front that is likely to have a major fundamental effect on the gold market.  MEG points out that while exploration spending hasn’t declined, there’s an interesting shift in the types of projects attracting the capex.

It notes that over the last few years only about a third of exploration spending has been directed towards greenfield (early-stage/generative) exploration, with the majority going towards brownfield (near-mine) exploration.  Even more troubling than this historically-low ratio is the fact that this industry-wide shift hasn’t resulted in a proportionate increase in assets advancing through the development pipeline.  Typically in brownfield work the availability of infrastructure allows for fast-track development, yet we aren’t seeing this.

On one hand I can see why the miners have become more risk-averse considering the state of the global economy.  It’s definitely less risky to prove up reserves where positive mining economics are known to exist.  But this trend will have consequences on the reserve-renewal front.

While miners will occasionally make big discoveries via brownfield efforts, for the most part the biggest discovery in a brownfield zone has already been made.  In general the major multi-million-ounce discoveries that this industry needs in order to effectively renew reserves are a product of greenfield exploration.  And this brownfield bias has led to a lack of major discoveries.

Interestingly there are a couple different ways we can put this lack of major discoveries into context.  First is some fascinating intelligence from MEG’s latest study on gold-reserves replacement.  According to this study, there have been 99 gold discoveries of significance (deposits containing 2m+ ounces) since 1997.  MEG added up all the reserves, resources, and production from these discoveries as of the end of 2011.  And assuming a 75% resource conversion rate and 90% production recovery rate, the total sum only had the potential to replace 56% of the gold mined during this timeframe.

As MEG’s data clearly implies, gold discoveries are not even close to keeping pace with mine production.  There are of course numerous factors contributing to this revelation.  But the one that likely trumps them all is the simple fact that large gold deposits are getting harder and harder to find.

As gold’s scarcity rears its face, miners must expand their exploration efforts.  They must drill deeper, venture to places with rougher terrains, and enter borders that may be hostile to their endeavors.  These conditions are characteristic of greenfield exploration, and are obviously much more costly than brownfield work.  And this cost differential perhaps explains why spending is not where it needs to be on the greenfield front.

Drilling down on MEG’s study even more, this 56% replacement rate is likely well on the high side considering some very liberal assumptions.  Even MEG acknowledges that the viability of this discovered gold is subject to a lot of variables that could hamper its mineability.

Economics is of course the biggest variable.  Many of these deposits are of low-enough grade or high-enough geological complexity that their higher extraction and/or processing costs require a much higher gold price to be economical.  If the price of gold retreats much, these reserves/resources would quickly lose their economic viability.

Geopolitical risk is also a major variable.  There are numerous amazing deposits that have been discovered over the last decade that will likely never be mined due to their location.  Miners are constantly thwarted by deep-pocketed environmentalists, unruly locals, over-regulation, and greedy governments.

So you see even though 99 major discoveries seems like a lot over a period of 15 years, in actuality it is nowhere near what is needed to replace the gold that is being mined.  And if the major deposits at best are only able to replace just over half of production, I can only imagine how many smaller deposits need to be discovered to fill the gap.

Speaking of gap fillers, this MEG research got me wondering more about the world’s gold deposits.  Wouldn’t it be nice to have a better understanding of the asset base that supports current and future production?  And wouldn’t it be nice to have some intelligence on the biggest tier of gap fillers, those in the 1m- to 2m-ounce range?

Thankfully our friends at Natural Resource Holdings were in this same wonderment.  So CEO Roy Sebag and his team actually took to the task of compiling this information!  After painstaking research that likely took thousands of hours, NRH now has the most comprehensive database of the world’s large gold mines and deposits that I have ever seen.  And its 2012 ranking offers an invaluable fundamental read on the world’s asset base of gold deposits.

As part of its research NRH identified 439 deposits throughout the world that currently contain over 1m ounces of resources (all categories).  And in looking at this data, I was smacked by the reality of how scarce this precious metal really is.  Of the tens of billions of dollars being spent just to find gold, there are only 439 deposits of meaningful size on the planet to show for it!

Interestingly in scrubbing up with MEG’s data NRH identifies 312 deposits that hold 2m ounces or more, which tells us that over two-thirds of the world’s largest deposits had been discovered more than 15 years ago.  And of these 312 deposits, provocatively only 150 are currently being mined.

On one hand it can be seen as encouraging that there is a large pipeline of undeveloped major deposits for future use.  But on the other hand it can be seen as disturbing that there are so many deposits, especially numerous over 15 years old, that haven’t found their way to production in the current market environment.  The fact is many of these deposits will never see the bottom side of a shovel, for reasons discussed above and more.

Of the world’s 127 gold deposits in the 1m- to 2m-ounce range, 39 are currently being mined.  Again it is encouraging to see so much potential for the next generation of mines.  But I’m afraid the same variables of uncertainty will again prevent many of these deposits from ever coming online.

This NRH data also allows me to put into perspective the relevance of deposits in this 1m- to 2m-ounce range.  Interestingly these 127 deposits hold a combined 181m ounces of resources.  If all of these resources were converted to mineable reserves with a 100% recovery rate, this would only be enough to cover just over two years’ worth of mine production.

And to put deposits of this size into even more perspective, consider their average annual run rates.  To be very conservative, let’s assume that these deposits are able to produce an average of 150k ounces per year.  In such a case the 39 operating mines would combine to contribute only 5.9m ounces, which is less that 7% of total mined volume each year.  While this next tier of deposit size seems large, in the grand scheme of things they collectively only make a small dent in the total supply.  And this realization clearly shows the need for major deposits.

Per NRH, of the major deposits 33 hold greater than 20m ounces (19 in production), 41 hold between 10m to 20m ounces (24 in production), 74 hold between 5m to 10m ounces (40 in production), and 164 hold between 2m to 5m ounces (68 in production).  Though this provides the gold-mining industry with an inventory of 162 major undeveloped deposits that have the potential to replace production and reserves, it’s just not enough.

And to make matters worse, there’s another prevailing trend that doesn’t bode well for the structural integrity of the mined gold supply.  With much higher input costs and uncertainty with the global economy, many miners have been holding off on the development of their major deposits.  Even if these deposits are economically viable with high rates of return, lenders and investors are hesitant to fund the $1b+ it would take to build a decent-sized mine.

So circling back around, is the gold-mining industry healthy?  Unfortunately if you peel away the excitement of record production in recent years, I’d say no.  Gold discoveries are not keeping pace with mine production, exploration spending trends are not conducive to finding major deposits, the inventory of large-sized deposits is thin, and development capex is harder to come by.  The future looks bleak for reserve renewal and ultimately sustaining current production levels.

So as investors, how can we apply this information to our investment strategies?  First is these major structural issues offer huge support for gold’s long-term fundamentals.  So long as the demand for gold stays strong, which it ought to, supply will be strained as the lack-of-major-discovery-spawned lower-reserve-renewal rate catches up with the gold miners.  And this will keep gold prices high!

Gold stocks should also continue to be great tools to leverage gold’s strength.  Most of the world’s largest producers are publicly traded.  And according to MEG it is the big ones that are doing the best job replacing their reserves, with the top 26 producers (600k+ ounces in annual production each) collectively replacing 208% of their production over the last decade.  But though this replacement rate is impressive, the larger gold stocks aren’t necessarily the best investments.

Interestingly only about half of these top-26 producers had actually made a major discovery over this timeframe.  With a collective two-bagger replacement rate for the group, there are obviously some miners that made elephant-sized discoveries to cover more than their share.  But to no surprise, a large chunk of this replacement was via acquisitions.  With robust treasuries and easy access to credit, these major producers aren’t afraid to swing around their financial weight to get what they need.

From an investment perspective it isn’t actually the large slow-moving majors that offer the greatest returns, but rather the smaller mining companies that act as feedstock for the big boys.  And the juniors especially offer huge potential considering their bias towards greenfield-style exploration.  Some of the biggest and best major discoveries have come at the hands of the junior explorers.

Now if you’ve been at all attuned to the gold-stock sector, you know that juniors are in a tough place right now.  Their stocks have been getting crushed with the rest of the commodities sector.  And with a business model that relies on equity investment, their losses are way outsized.  But as a critical component of the global gold supply chain, the majors simply couldn’t survive without them.

Juniors’ fortunes are bound to change soon as the gold-mining industry starts to realize its shortcomings.  And because they are so beaten down, investors now have one of the best opportunities in gold’s bull to buy them for cheap.

At Zeal our last several research reports profile our favorite high-potential gold juniors.  So if you’re wondering which junior gold stocks are likely to thrive in the years ahead, buy your report today!  And to find out which ones we are specifically recommending in our acclaimed weekly and monthly newsletters, subscribe today.

The bottom line is the gold-mining industry has done a fine job rising to the challenge of increasing production in order to meet higher demand.  But behind the curtains are some health issues that ultimately lead to a lack of fundamental support for the future of this industry.

The fact is major gold deposits are getting harder and harder to come by.  And this is reflected by a global development pipeline that is woefully short of where it needs to be.  Until exploration spending rises and the miners hit the hills for more greenfield discoveries, reserve renewal will continue to be a major challenge.

By Scott Wright

So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence , that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research as well as provides in-depth market analysis and commentary. Please consider joining us each month at … www.zealllc.com/subscribe.htm

Thoughts, comments, or flames? Fire away at scottq@zealllc.com . Depending on the volume of feedback I may not have time to respond personally, but I will read all messages. Thanks!

Copyright 2000 - 2012 Zeal Research ( www.ZealLLC.com )

Zeal_LLC Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules