Exerpt from article...This is an excerpt from an article by Jim Puplava, the complete article can be read on Kitco's site:
Junior Discoveries Shine
During the bear market of the last decade majors could purchase juniors at a price of $25-$30 per ounce in the ground. The price of gold was depressed and after the Bre-X scandal, juniors were merely trying to survive. The days of $25-$30 per ounce in the ground are gone forever. Gold isn’t going back to $255 again, so $25-$30 gold is a pipedream. What we are more likely to see in the future is $100 an ounce for gold in the ground. Even higher prices will be realized for high quality reserves that can be mined at an economical cost. There are simply no other alternatives outside making new elephant size discoveries similar to the Hemlo, Grasberg, Yanacocha mines. The odds of discovering a Hemlo each and every year are not impossible, but more likely improbable. The majors are going to have few choices outside the junior mining arena because that is where all the new gold and silver deposits reside. It has been the junior mining sector which has been both nimble and successful with the drill bit. The juniors have been doing most of the discovery work, while the majors have sat back and acted more like finance companies, a situation that is very similar to what is going on in the oil and gas industry.
Unless the majors are willing to act soon (and I think they will) they are going to face angry shareholders who will want to know why production keeps declining, while the price of gold and silver soars. If you were a major mining executive, would you want to be facing shareholders each year at the annual stockholder meeting and talk about why production keeps declining? The share price of majors, which have lagged far behind the junior mining or second tiered producing sector, may fall further behind as investors begin to take notice. It will become similar to what has happened to the price of gold hedgers such as Barrick and Placer who have seen their shares lag the markets considerably. Their hedge book has capped gold prices and profits. What worked during the bear market in gold doesn’t work anymore when you are in the beginning stages of what could be the biggest gold and silver bull market in the last 100 years. It is all about supply and it is supply that matters. The companies that can find and produce the gold and silver wins in this new major bull market in metals. In the majority of the cases these are the juniors.
Investor Influence
The problem for the majors is that they are going to see stiff competition in the search of ounces. Their competition this time around is not just from their peers, it will also come from investors. Believers in this bull market have been accumulating bullion and junior mining shares for the last 2-3 years. When we invest in a junior, those shares are permanently taken off the market. As an investor and a believer in this new bull market, we don’t trade our shares. We hold them as long-term investors. Simply put, there is a shortage of high quality product out there. We own only 7 juniors, but our positions are sizable in the companies we own. When we buy, we hold. This means that shares are taken permanently off the market. This leaves fewer shares to buy, which can only lead to higher prices down the road as ounces are added on the balance sheet.
The gold and silver mining market is small by comparison to other financial markets. Just three companies, Newmont, Barrick and AngloGold make up 35% of the market capitalization of all listed gold and silver stocks. The market cap of the Amex Gold Bugs Index is only $50 billion. The market cap of the Philadelphia Gold and Silver Index is only $71 billion. The market cap of many juniors is only $25-$50 million -- chump change in today’s global financial markets. Quite simply, there isn’t enough gold and silver bullion or mining shares to satisfy investment demand. The entire gold and silver bullion market along with the capitalization of all gold and silver mining equities is not much over $130 billion. This market is minuscule in comparison to the global market capitalization of stocks and bonds which runs in tens of trillions of dollars.
For the majors it is a tough call. Do you go out and try to find the ounces--a process that can take 5-7 years, or do you step up to the plate and pay up for gold that has already been discovered lying dormant in the ground in the portfolio of a junior exploration company. My analysis tells me they embark on an acquisition spree once they realize their precarious predicament. For many of the majors, their mine life has been declining.
tutank