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Current activity a portent to future gold dearth

Current activity a portent to future gold dearth

Photo by Bloomberg

16th September 2014

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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DENVER, Colorado (miningweekly.com) – At the current rate of new gold deposit discoveries around the globe, new finds would only be able to replace about 600-million ounces, or half of the industry’s total output in the last 14 years.

This was the stark message professional services firm SNL Metals & Mining VP of sales David Cox told delegates attending the Denver Gold Forum on Tuesday, adding that the potential amount of replacement reserves could become significantly less when one took into account that many of the deposits were located in high-risk geopolitical areas, or low-grade deposits that did not necessarily have favourable economics.

Cox noted that between 1999 and 2013, the global gold industry reported total output of 1.3-billion ounces, of which only 600-million ounces were defined in new discoveries in the same period.

“From 2006, there has been a significant decline in discovery rates. By 2025, we could have only one-third of new ounces that were available in the mid-1990s in production,” he said.

This meant that the industry’s output was expected to start declining from 2016 onward.

Cox noted that discovery was the only way to increase supply; however, discovery rates were dropping and were exacerbated by company cutbacks on exploration budgets by both the industry’s major and minor players.

Despite gold remaining the top target of all commodities being looked for, the average budget for this critical activity was in decline. Exploration budgets, as a per cent of revenue, peaked in the mid-1980s and, most recently, in 2012 at 3.5%, but Cox warned that should the industry reach the lows seen in 2004 of about 1.5%, the industry could see about 50% of current spending being slashed.

New discoveries over the past 14 years were centred in North America, Latin America with 30% – led by Peru, Chile and Mexico – and in West Africa – led by Burkina Faso, Ghana and Mali – which outstripped new discoveries in traditional gold producer South Africa. Australia accounted for 11% of all new discoveries.

While junior companies were traditionally the standard bearers on the exploration side, their relationship was inverse to that of the majors’ exploration spending, which took up the slack during down cycles when capital dried up.

Cox noted that earlier this year the market saw a brief window of increased equity financing, adding that it had by now all but evaporated and the trend was well below that of previous years. From 2008, juniors raised about $16.5-billion.

GRASSROOTS TURNDOWN

Grassroots exploration was in a long-term downturn, while the number of late-stage projects was also in decline.

Cox expected a drop of 30% in overall exploration budgets this year and a 35% to 40% decline in budgets looking for gold specifically. He reckoned that the total budget for gold exploration would total about $5-billion.

The gold-industry trend was currently focused on expanding existing deposits and not finding new deposits. Only 3% of all the gold industry’s funds were spent on finding new deposits, down from 6% over the same period last year.

For example, drilling equipment and services provider Major Drilling in its second-quarter report noted that only about 25% of their drills were currently active.

Cox also noted that new initial resource announcements were at a low. He said it took explorers, on average, about two years from initial discovery to making maiden market announcements.

However, the time from discovery to production was rising, with the time it took from project discovery to production currently standing at about 20 years. He noted that the discoveries today needed to plug the looming production gaps 15 to 20 years from now as brownfield discoveries would not be enough to make up the deficit. By 2018, it would possibly take about 30 years to develop a mine.

RISKY PROJECTIONS

Cox pointed out that gold projects currently in the feasibility-study phase could have total capacity to produce 22.4-million ounces, but if high-risk jurisdictions were taken into account, the amount fell to 18.7-million of potential new production to come online. When the low-grade projects were also taken out of the equation, the total fell to nine-million ounces.

The declining gold price also had an effect on calculated reserves, which had been dropping with the price over the past two years. The average industry gold grades had fallen to 1.1 g/t from about 1.5 g/t in 2005.

“Compounding the quest for new high-grade deposits is the fact that there has also been a steep increase in the all-in cost of gold production. In 2004, it was about $400/oz, climbing to $1 300/oz in 2012, and with prices moving sideways at the moment, margins have now slipped to 16% – too low to compensate for the industry’s capital risks,” Cox argued.

He contended that the perceived future scarcity in gold production could be partially reversed with increased political and social stability in high-risk areas – which could open up underexplored regions – the discovery of new major gold camps, exploration in frontier areas, such as the Arctic, and the advent of marine mining, which could impact new discoveries and new technologies.

“It is likely that new finds and camps will attract premiums in the future. We already saw that with a price struggle to obtain Osisko Mining this year. The growth stories could in future be better for the smaller producers as they are likely to bring forward smaller, higher-grade projects, and I expect more spinoffs from the majors,” he said, noting that the market could also continue with its consolidation momentum, which he saw as a positive trend.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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