A MUST READ!Have a read of this post I came across on another board. This should surely put the future of gold prices somewhat into perspective for even the most novice investor (which I am)! Nice to see CGR got some more press!! Pay close attention to the part about share prices this coming year for juniors with reserves!!
JUNIOR FESTIVAL 2006 – Part II
by Eric Hommelberg
January 05, 2005
In my piece ‘Junior festival 2006 – Part I’ I focused on the technical setup for the juniors in 2006.
As explained the setup is phenomenal and some serious gains are in the pipeline this year for those juniors succeeding in making discoveries. Well, we didn’t have to wait for that long before the festival to start this year since the gold price exploded on the very first trading day of 2006 thereby launching the gold shares (majors) into new highs. The HUI clocked its single biggest day gain ever thereby leaving investors waiting for a correction since early December in a mental state of sadness. So after all a perfect start for the gold shares. Beside the phenomenal technical setup there’re some fundamentals in play which are extraordinary bullish for the junior shares as well. Especially those making discoveries will be making headlines this year for sure. Now why is that? What on earth makes these discoveries so important?
This piece examines the need for new major discoveries and what it can do to your bank-account.
As John Brigde (senior gold analyst JP Morgan) said:
If you are lucky enough to buy into an exploration company that makes a discovery, you can effectively buy your own auto teller machine. Some of these things are just phenomenally profitable.
This piece will furthermore focus on:
Decline in gold production only getting worse
Majors scrambling for new gold reserves
Juniors primary source for new gold reserves
Smart money pouring into juniors
Bidding war for new proven gold reserves not unimaginable
Decline in gold production only getting worse.
Two high profile gold industry leaders rang the alarm bells lately regarding future mine supply:
DRDGold chief executive officer Mark Wellesley-Wood in the company’s latest investor newsletter (Nov 05):
Global gold production is set to decline dramatically over the next four years and this is set to generate a scramble for gold ounces. END.
Newmont President Pierre Lassonde:
Bloomberg quoted him (November 27, 2005):
“Worldwide gold production last year had the largest decline in 39 years, Lassonde said.”
“The decline in output will continue “for at least another couple of years simply because the industry didn’t put money back into the ground when the gold price was very low,” Lassonde said”
We’ve seen South Africa’s gold production falling of a cliff last two years reaching a 80 year low recently.
For many years people have been warning for the current decline. One of the strongest warnings came from Barrick’s Exploration VP Alex Davidson who said in March 2003:
"Big mining companies need to spend more on exploration, or else, at current annual production rates, reserves will be depleted in 10 years, he said. It can take six to eight years between making a discovery and starting mine production, and "we're not currently funding exploration at a level required to replace reserves."
Majors scrambling for new gold reserves
You would think that higher gold prices would solve the issue since more money would be spend on exploration then. Well, although there’s money heading towards the exploration sector these days indeed it won’t be of any help in the short term.. Why not? Because it takes years from exploration to production. Barrick CEO Gregg Wilkins said:
The average lead time for a large discovery to go on-stream with production was around five to seven years but that seven to 10 years was probably more realistic. “. "The industry isn't going to be able to respond immediately to higher gold prices. It is going to take a long time."
So there it is, the industry isn’t going to be able to respond immediately to higher gold prices. How come? Simple, during the 1997 – 2002 period exploration budgets were cut by 67% so the mining industry is still relying on discoveries that were made many years ago. Let’s first take a peek at the major discoveries being made over the last 25 years:
As you can see almost no world class discoveries have been made since the mid nineties and only a very few large discoveries since the late nineties..
According to Newmont’s president Pierre Lassonde it will take another 18 – 24 months before we will see new discoveries in the five million ounce range..
But hey, the major producers are pulling each 4 – 7 millions of gold out of the ground every year and no major discoveries are expected in the short term, so tell me, how are they going to replace those mined reserves?
Well, the answer is simple, they can’t!
Industry consultant Ralph Bullis even fears that the large gold producers won't even survive at current extraction rates over the ... next five to ten years. His calculation is straight forward, he says that the top 5 Gold producers are each pulling each between 3.5 million and 7 million ounces out of the ground every year. In order to keep up with the current production rate the miners need to replace their mined-out reserves through Exploration . But that's exactly the problem. In order to replace 3.5 - 7 million ounces of Gold each year you'll have to find a major world class gold deposit ( > 5 million ounce) each year which is highly unlikely. Bullis refers to the U.S. Geological Survey's database of global gold deposits and notice that of the 792 discoveries listed of greater than 100,000 ounces, only 6 percent contained 5 million ounces of gold or more.
Bullis goes on and says that even if a big discovery is made, it can take anything between three and 10 years to permit a mine in Canada and the United States, prospective areas where the major miners are looking for gold. This is in line with earlier comments from Piere Lassonde and Greg Wilkins who made it clear that the Gold Industry isn't going to respond immediately to higher Gold prices.
(Ralph Bullis was Exploration Director of Echo Bay Mines for more than a decade and was a member of the Canadian Institute of Mining committee, which helped set up guidelines on how to estimate mineral resources and reserves)
Don’t let you fool yourself by analysts claiming that there’s no problem at all. They argue that there’s still 30.000 tonnes of gold left in the ground so gold producers can produce for another 10 years at current production rates thereby giving them plenty of time to explore for new reserves…They fail however to recognize that most of the easy ore has been mined already and that not all ore-reserves will be mined anyhow (last remaining reserves become too difficult and too expensive to mine). A good case in point was the Homestake Mine in South Dakota, which was shut down with a large base of ore "reserves" (millions of ounces) still on the books.
Juniors primary source of new gold reserves
So if the major companies won’t be able to find new reserves in time themselves, what to do then? Sure enough they have to turn to the juniors since they are making 75% of all discoveries.
Please don’t think those remarks are exaggerated, the majors already showed an increased interest in juniors for more than two years now:
Barrick opened an office in Vancouver in order to monitor Junior companies.
"Barrick Gold's New Office Tracks Junior Exploration Cos.”
“Barrick Gold Corp. (NYSE:ABX) has opened a Vancouver office to monitor junior exploration projects, executive vice-president Alex Davidson said at an exploration conference. Davidson said two or three employees in the office are tracking junior projects, and visiting managers of companies and their exploration sites. The local office also handles Barrick's exploration efforts around Eskay Creek, its 100%-owned gold mine in northern B.C." END.
AngloGold CEO Bobby Godsell:
It is the end of big picture gold consolidation; there is no compelling logic to combining anymore. The real challenge now is how to replace your ounces for the future." The race to replace ounces is about to begin. It will take the form of takeovers of small producers with long reserve lives and high quality junior mining companies with large in ground reserves that can be mined economically. END.
A few months later these thoughts were echoed by Sam Jonah, the company president :
Where will AngloGold by next ?
Sam Jonah, the company president says small gold companies will be the point of entry.
"We will look at juniors that have attractive assets in there portfolios and require our expertise and capital to move these projects forward." END.
Gold Fields: Investing in juniors make sense
Ian Cockerill : “We invest in 10 juniors in the hope that one or two of them come up trumps, and the value you get off the table there will pay for the other eight that do not. But you are spreading your exploration dollars, It increases your chance of success.”
“It has been a very successful program,” Cockerill declared. He estimated that Gold Fields invested $30 million to $40 million in the junior exploration company process, converted $120 million in value, of which $40 million was harvested.” END.
It seems that the interest in juniors slowly morphed into a buying spree during last quarter 2005:
World's Largest Gold Producer to take Significant Position in Miramar
Miramar Mining Corporation is pleased to announce that it has entered into an agreement (the "Subscription Agreement") with Newmont Mining Corporation of Canada Limited ("Newmont") whereby Newmont will purchase, on a private placement basis, 18.5 million units (the "Units") of Miramar at a price of $2.35 per Unit for gross proceeds of $43.5 million.END.
Goldcorp takes 9.8 % stake in Wolfden
Goldcorp will spend about C$21 million ($17.9 million) to buy a 9.8 percent stake in the mineral exploration firm Wolfden. Goldcorp became interested after a series of good drilling results on the Bonanza Project in the Red Lake Mining District, Ontario. END.
Goldcorp buys Virginia’s Eleonore project
TORONTO, Dec 5 (Reuters) - Goldcorp Inc. (G.TO: Quote, Profile, Research) will buy Virginia Gold Mines Inc.'s (VIA.TO: Quote, Profile, Research) Eleonore gold project in Quebec in a stock deal valued at about $420 million, the gold producer said on Monday. END
Newmont Mining raises stake in Gabriel Resources to 19%
Newmont Mining Corp., the world's largest gold miner, paid C$30 million to raise its stake in Gabriel Resources, which is developing the Rosia Montana gold project in Romania, to just under 19%. END.
The trend is obvious and the acquisition of Virginia’s Eleonore project proves beyond any doubt that juniors making discoveries are paying off!. Before discovery Virginia traded around 1 CAD$ while currently trading at 11 CAD$. I’m confident you can do the math yourself.
Smart money pouring into juniors
So if the major companies are going after the juniors why wouldn’t you as an investor do the same? You wouldn’t be the only one, one of world’s most savvy gold industry insiders is doing the same and he’s not playing here with Mickey Mouse money, he’s investing millions in promising junior companies. Yes, former Goldcorp CEO Rob McEwen is certainly in a buying mood and seems to be unstoppable:
Rob McEwen Acquires 20 % Stake in Coral Gold.
Rob McEwen to purchase up to 1,250,000 shares in Coral Gold Resources Ltd., becomes a Director and Executive Chairman of the Board
Coral Gold Resources Ltd. (the “Company”) has arranged a non-brokered private placement of up to 1,500,000 common shares at a price of $3.00 per share. The placee for up to 1,250,000 shares is Mr. Robert R. McEwen and upon closing he will hold just under 20% of the outstanding shares. END
Rob McEwen Acquires 18.2% Stake in Nevada Pacific Gold Friday December 9, 10:20 am ET
Nevada Pacific Gold Ltd. is pleased to announce that, subject to regulatory approval, it has entered into an agreement with Mr. Robert McEwen, of Toronto, Ontario to issue 12,500,000 Units at a price of $0.40 per Unit for aggregate proceeds of $5.0 million. END
Rob McEwen Acquires 33% stake in U.S. Gold'
Denver, Colorado, July 29, 2005 - U.S. Gold Corporation (OTC BB:USGL) is pleased to announce that Rob McEwen has purchased by way of private placement with the Company, 11.1 million shares for $4,000,000 becoming the Company's largest shareholder with 33.3% interest. It is planned that Mr. McEwen will be assuming the role of Chairman and CEO shortly following the planned resignation of current management. END
Rob McEwen Acquires 10.5% Stake in White Knight Resources.
Robert R. McEwen has purchased 5,681,705 common shares of White Knight Resources Ltd. by way of a private purchase from Goldcorp. The purchase price was based on the higher of the current trading price or the 10-day average trading price to June 28, 2005. Mr. McEwen now owns 10.50 per cent of the outstanding common shares of White Knight. These shares were purchased for investment purposes. END
Highlights:
The industry is not replacing the reserves it is mining every year
High grade mines are running out of ore.
If Gold were $1000 / oz , it still takes four to seven years to open a mine.
The industry isn't going to be able to respond immediately to higher gold prices.
Reserves will be depleted in 10 years at current annual production rates
The industry needs some major new finds desperately. Since 1999 only a very few world class gold deposits have been found.
Newmont President Pierre Lassonde expects new world class gold discoveries (> 5 mio ounces) in 18 months to two years time
Majors are forced to acquire juniors because of the need for more reserves
Juniors making discoveries are phenomenally profitable.
So after reading all this you might be interested in buying some junior shares as well.
In our ‘Gold Discovery Premium Service’ we mention those junior exploration companies which are in discovery of gold and silver at this very moment. Juniors in a discovery phase were the real winners in 2005. And they will probably amaze everybody in 2006.
Our Discovery portfolio which started at November 01, 2005 reached an average gain of 35% so far.
People interested can sign up HERE
All the Best,
Eric Hommelberg
The Gold Drivers Report/ The Gold Discovery Letter