Declining Gold Reserves Benefit JuniorsDeclining Gold Reserves Benefit Juniors
By: Eric Hommelberg
On Sept 15 I’ve send some comments to Bill Murphy of LemetropoleCafe regarding dwindling Gold reserves and how it will benefit the juniors. Although these notes weren’t intended to be published as a separate essay they were published as such. Therefore I would like to enhance these notes with additional background information in order to create a better understanding of why we’re heading towards a decline of Gold production and how it will benefit the high quality junior mining companies.
DECLINING GOLD RESERVES BENEFIT JUNIORS.
Already in 2002 a study published by Beacon Group Advisors forecasted a decline of Gold production of 35% over the next 5 to 8 years. (see graph below)
The reason for this was a lack of Exploration during the 1997 – 2002 period. During this period Exploration budgets had been cut by 67% simply due to the fact that Exploration programs weren’t profitable with a Gold price below $350 / ounce. No Exploration means no new Gold deposits ! It’s as simple as that !
During 2002 lots of alarm bells were being raised by industry insiders indicating a further decline of Gold reserves indeed.
April 2002 : AngloGold
AngloGold also sounds alarm on Gold supply !
Gold Mining companies have warned that supplies of the precious metal are poised to fall sharply. The latest producer to sound the alarm bell that the industry was running out of Gold faster than it could replace it was world number two miner AngloGold, which predicted that the big discoveries of the past 20 years would run dry.
Sept 2002 : Denver Mining Conference.
Gold Executives this week gave anecdotal and numerical evidence of trends the industry has long hoped would boost what has been an ailing industry. Those trends include steady drops in yearly global output of Gold as Miners merge or "mothball" properties that can't turn a profit at Gold's current price of $322 an ounce !
Sept 2002 : CBS Market watch.
Global Gold output is seen falling 3% this year. It's biggest drop since 1976
Sept 2002 : Reuters
Gold output on slippery slope. Production levels at Gold Mines might not be sustainable because of depleted reserves at mature North American Mine operations and a fall on new mines on steam.
October 2002: The Australian Institute of Geoscientists.
The decline in Australia's Gold Industry continues.
Declining Exploration in Australia's Gold Industry is continuing to hurt production, with Gold dropping a further 8% in the year to June 30.
END.
Then in March 2003 the strongest warning regarding dwindling Gold reserves came from Barrick’s Exploration VP Alex Davidson who said :
Alex Davidson, VP Exploartion Barrick : (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," Davidson said."
END.
Wow, depleted Gold reserves in 10 years at current production rates.
Still these facts were met by denial. Especially (not surprisingly) the Gold bears were pointing to rising Gold prices and argued that Gold producers would be propping up their production immediately when Gold prices should rise any further. But unfortunately they forgot to mention ‘how’ producers were supposed to do that without new Gold reserves. They failed to recognize the fact that in order to mine new Gold properties you’ll first have to find them. Even if you throw all the money you want into a new Exploration play, it still takes years before a new discovery will be made. On top of that, it takes another 4 to 7 years to bring this new discovery into production. So there it is, no matter what the Gold price does, no matter how much money will be spend on new Exploration plays, is was clear that Gold reserves for the next couple of years was supposed to go down. These sentiments were echoed by Newmonts president in August of 2003 when he said
Pierre Lassonde, CEO Newmont : (August 31, 2003)
"The 20-year bear market in gold has weeded out marginal gold producers and significantly curbed exploration and production.
"If gold was $1,000 an ounce, it still takes four to seven years to open a mine," he said."
END.
So enough Alarm Bells were being raised during 2002/2003 and during 2004 even a blind man can see Gold production going down. The following headlines tell it all :
Thursday February 12, 2004
AngloGold saw reserves fall by 9.2-m ounces last year
AngloGold's Geologists failed to replace all the ounces it produced last year.
Monday February 16, 2004
Ashanti Announces Gold Production Lower Than Forecast
Tuesday March 2, 2004
SA gold output 4,9% lower in 2003.
Friday March 12,
Gap in Gold Production Looming
Friday April 2, 2004
Harmony Gold cuts production by 6%
Sun May 23, 2004
Aussie gold output hits record low
Friday June 18 2004
South African gold production tumbles 8.3% in first quarter
Thursday July 8, 2004
Gold supply down in Peru by 6.3%:
Wednesday July 7, 2004
Barrick Gold production declined to 1.28 million ounces in the second quarter from 1.47 million ounces a year earlier
Tuesday August 24, 2004
Australian gold output falls 16% in June qtr compared to June qtr 2003
Monday September 13, 2004
Gold miner Cambior Inc. (CBJ.TO: Quote, Profile, Research) on Monday said it expects gold production will decrease over the next four years
END.
Conclusion :
We’ve seen enough Alarm Bells being raised regarding future Gold Supply. Reading all statements above I think it’s fair to say that at least for the next four years no increase in Gold supply should be expected. Indeed, Producers will be struggling to replace their dwindling Gold reserves while demand on the other hand will increase. This puts an ever increasing pressure on Hedgers to close down their remaining hedges as soon as possible thereby even further reducing Gold Supply. It should be obvious by now that bear-arguments such as :” higher Gold prices will be reversed due to propping up Gold production” have no merit at all, at least not for the next five years.
END.
So here we are : How do you think major producers are going to replace their dwindling Gold reserves in short term ? We just noticed that this seems to be impossible within coming years, so the only other way out is to go after the high quality junior companies with promising assets or on the verge of discovery. It seems that the major companies are waking up indeed :
Barrick already opened an office earlier this year 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."
And what about Anglogold ?
AngloGold CEO Bobby Godsell said:
"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 month later these thoughts were echoed by Sam Jonah, the company president :
Where will AngloGold buy next?
Monday August 2, 2004
"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.
People like Bobby Godsell publicly speaking about takeovers of high quality junior mining companies and Barrick tracking junior mining companies leads to only one single conclusion:
Juniors with world class properties or on the verge of Discovery will be in the spotlight soon!
And what about Newmont ? Are they interested in Juniors ? Well, it seems they are ! They just took an interest in Gabriel Resources Ltd. So what happened to its share price ? Well, it shot up by 54% !
Newmont adds muscle to Gabriel gold find, stock up
Monday August 30, 2:47 pm ET
By Nicole Mordant
"VANCOUVER, British Columbia, Aug 30 (Reuters) - Shares in Gabriel Resources Ltd. leapt as much as 54 percent on Monday on news that the world's biggest gold producer plans to buy a stake in it -- a major credibility boost for the small Canadian miner that owns Europe's largest gold deposit. "
"At a time when the world's biggest producers are mining out reserves more quickly than they are replacing them, the project is regarded as a big and important future source of gold, and rumors have surfaced frequently that a major may buy it."
END.
You see ? A junior company with promising assets gets attention from a major producer and voila, stock going straight up by 54% !
And what about juniors making discoveries ?
In Feb this year Victoria Resources announced good drill results. Did it had any effect on its share price ? Sure, Victoria shares were on a launch pad and doubled over night, yes 100% in a blink.
You get the point ? : High quality junior companies can be extremely rewarding with or without higher Gold prices.
Of course dwindling Gold reserves is only one (although extremely important) parameter effecting junior companies. Needless to say that an increase in Gold demand will only exaggerate this issue (to the benefit of course) and that other fundamentals such as a declining dollar, negative real rates, end of cheap oil, inflation worries etc.. will do either.
Conclusion :
Fundamentals such as increase Gold demand, a declining dollar, negative real rates, end of cheap oil, inflation worries etc.. will have a positive impact on Gold and its shares in general (juniors included), but the dwindling Gold reserves provides an additional booster for the high quality juniors. So, major producers are facing a decline of ounces per share. That obviously means a decline in value as well. In order to compensate for this value-decline the producer needs a higher price of Gold. So investing in senior producers is betting on higher Gold prices. In other words, the only pillar carrying a major producer forward is a higher price of Gold !
So from an investors' point of view it makes sense to invest in Junior Exploration companies with potential discoveries. Why ? Simple ! We saw how desperate the major producers are in order to replace their dwindling Gold reserves. We saw that new discoveries are rewarded tremendously by the market. So compared to their senior brothers the Juniors are being carried forward by two pillars instead of one.
September 19, 2004
Eric Hommelberg
Comments are welcome at :
ehommelberg@planet.nl
-- Posted Monday, September 20 2004