GOLD DISCOVERIES NOT MAKING THE GRADE

The big worry faced by any investor in a mining company is reserve depletion. When the ore is all extracted, it’s the end of the road for shareholders, unless new reserves can be found.

A new report from Metals Economics Group, the mining research outfit based in Halifax, suggests investors in the gold mining industry should be concerned that their prime asset – metal in the ground – is being depleted.

The firm looked at all the significant gold discoveries (defined as deposits containing at least two million ounces) made from 1997 to 2011, and tallied up what miners have found, compared with what they hauled out of the ground during the same period. It isn’t a pretty picture for long term sustainability. There were 99 big discoveries containing a total of 743 million ounces. MEG estimates the discoveries only replaced 56 per cent of the estimated gold mined.

MEG isn’t worried that the world will run out of gold any time soon. The problem for the industry is that it is replacing current, high grade mines in stable locations, for development projects comprising of low-grade, riskier deposits. Long term, this isn’t a good thing for the industry.

Link to the article: HERE

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Here we see that the Gold Mining Industry is having trouble replacing reserves to match their past and current production. Not only is the problem of finding decent ore grades, but having the cheap and available energy to mine and produce the metal. Again… no one is looking at this.

If we consider the following:

1997-2011 Total World Gold Production = 1.328 billion oz.

1997-2011 New Large Gold Discoveries = 743 million oz

The remainder they did not include in the report were probably gold resources of lower amount and ore grade. I believe most juniors with low ore grades and no forecast for commercial production until 2020, will never become mines….a few might but most not.

I will be coming out with an interesting comparison between two silver mines.  One in the 1880-1900 period and another small silver miner in current production.  The difference you will find is simply amazing.

Comments

  1. $10,000 Gold and $5,000 Silver (or possibly the reverse due to all the factors affecting silver) – sounds good to me.

  2. HERE IS ANOTHER WAY TO LOOK AT IT

    Even though gold miners are not replacing their reserves, future silver production may be in more jeporady.  Why?  Take a look at the chart below:

    Most of gold comes from primary mining (80%).  Whereas, only 30% of silver comes from primary mines and 70% comes from base metal mining.  When declining net oil exports, falling EROI and peak oil hit the overall mining industry, base metals will suffer the most.

    Because gold holds such a high value as money, I suspect energy will be directed to the mining of gold and less to base metals.  Thus, silver production will fall greater in percentage than gold in the future.

  3. How would gold stocks fair if discovery slowly dry up, while demand is rampant? Oil stocks are doing well despite the oil comps’ claims that oil is finite, made of dead dinosaurs. That it is non-renewable during humanity.

    I am looking to buy a mix of gold and maybe even silver stocks (I am a silver bug) but not sure where to start.
  4. I’ve got some Endeavour Silver (EXK) and Silvercrest Mines (STVZF).

    Endeavour recently bought an additional mine (El Cubo) from AuRico Gold.  They now have 3 operating silver mines in mexico.  Before buying the mine, they were on track with a planned 20% increase in silver production.  They are profitable, with zero debt, and lots of cash in the bank, and terrific management.
    Despite the name, Silvercrest mines is mostly a gold miner with some silver (about 75% gold, 25% silver in revenue).  They have recently completed development and started production of their Santa Elena open pit mine.  As a result, they have turned from losing money (while developing the mine), to incredibly profitable (as they now have an operating gold mine).  They have are using their profits for mine expansion (developing an underground mine, and buying a CCD mill to process the metal).  They are largely undiscovered, as they only have 2 quarters of profits so far, and only just 6 months ago got their new Santa Elena mine operating at steady state production.
    Both stocks are down from their February highs, so when the price of silver takes off, then these puppies should zoom upwards (increasing silver price = massively increased earnings)
  5. HOW WILL GOLD STOCKS DO IF RESERVE REPLACEMENT SLOWS DOWN?

    This is a good question.  Any precious metal mining company is only as good as its reserves in the ground.  Once the gold or silver is gone, the stock goes to ZERO.  If reserves are not replaced, or worse, if fuel supplies become short supply…. miners may have good resources in the ground, but not the means to pull them out of the ground.

    This is by far the BIGGEST ITEM OVERLOOKED BY THE GOLD & SILVER COMMUNITY.

     

  6. While reserves are important, there are several other factors to consider.  A mining stock is still a stock in a company.  That company has expenses (cost of mining), and production efficiencies.  If a company is well, run, then it will be profitable at todays prices.  (It may make astronomical profits at tomorrow’s prices if the price of metals skyrockets).  Very often, actively producing junior miners will buy exploration properties, which they plan to develop, in order to ensure future production.

    Some mines also have exceedingly long lives.  Often they don’t really know how much material there actually is, but they can come up with a minimum that can be easily and profitably mined.  That’s what’s known as reserves.  Over time, the reserves in a mine can actually increase (as newer technologies make it more economically feasible to mine metal).  Homestake mining went public in the 1870′s (afaik), was one of the few profitable companies through the great depression, was able to sell gold after FDR confiscated everyone’s gold bullion, and was actively mining metal up until about 2000 or so, until it was sold to Barrick Gold.  It was founded by George Herst (father of William Randolf Herst – the media mogul).
    If the price of a metal goes up significantly, and there are not too many mines left actually producing, then the mining stocks which are left, will be worth a great deal.  If you believe that metal will become so scarce, that people will not be able to get any, then money will flood into precious metal mining stocks, and these stocks will command exceedingly high multiples.
    Finally, owning stock in a Canadian company which mines precious metal in Mexico (a mining friendly government), provides a strong degree of security against possible future confiscation of bullion by US authorities.
    Personally, I think that owning profitable precious metal mining stocks as well as physical bullion provides good (precious metal) diversification.
    Tony
    PS: I personally don’t like the senior producers, as these companies often sell their metal forward (sell their future production at today’s prices), which can limit their growth.  In any case, make sure to do your proper due diligence before buying anything.  Naturally, this is not investment advise, and I’m not a financial advisor.
  7. THIS TIME IS INDEED DIFFERENT

    For some reason CEO’s, mining analysts, and the investing public believe that if a company says they have reserves-resources in the ground.. that it is only a matter of time before they pull it out.  This was true up until now.

    However, peak oil, declining net oil exports and the falling EROI may keep them from mining them in the future.  This is the most CRITICAL FACTOR that is not understood.

     

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