A Monday Morning Musing from Mickey the Mercenary Geologist
Contact@MercenaryGeologist.com
December
3, 2018
Along with many in the
natural resource business, I read Ian Telfer’s dire prediction for world gold
production in a May 16, 2018 interview with Canada’s Financial Post with
interest. Here’s an excerpt:
“Are we not looking
for it? Are we bad at finding it? Or have we found it all? My answer is we
found it all. At US$1,300 gold, we found it all. I don’t think there are any
more mines out there, or nothing significant.”
We all know this guy as
the esteemed Chairman of the Board of Goldcorp Inc and he apparently
thinks geologists have found all the significant gold deposits on Earth and
we should just give up exploring for more.
I strongly disagree with
his malthusian view (note that I refuse to capitalize such a flawed, doom and
gloom outlook of Earth) on the future of gold mining.
I also recall that Telfer
was the former COB of Uranium One. In 2010, he engineered the sale of 25% of
America’s annual uranium production to the Ruskis via the state-controlled
company Rosatom.
At the time, Hillary
Clinton served as Obama’s Secretary of State and this sale required US State
Department approval.
During the acquisition
and arguably not by coincidence, Telfer’s family trust made a $2.35 million
contribution to the Clinton Foundation (New York Times, August 23, 2015).
Borrowing from my friend
Grant Williams, I say this about that: “Things that make you go hmmm ...”.
But I digress…
I will grant you that any
one or all of the cabal of serially unsuccessful major gold miners, including
Goldcorp Inc, may have found all the gold that they are capable of finding.
As we demonstrated in this white paper, major gold mining is a failed
business model (Mercenary Musing, February 2, 2015).
However in my opinion,
Telfer’s categorical statement is fake news, and I will show you why with a
series of charts and tables.
This chart shows annual
production from six major gold miners since gold bottomed at $255 an ounce in
year 2000:
In this table, we
document the percentage decline in production of the six miners since they
each reached “peak gold”:
Note that Goldcorp is a
much younger company than the five others and has only recently reached its
peak gold. That said, GG’s 25% decline in gold production over the past two
years is alarming with 2018 guidance indicating another drop of two tonnes.
Let’s switch gears now
and look at six mid-tier gold miners. Their production has increased
stupendously from 2000 (or 2003) to 2017.
Only Yamana Gold has
fallen significantly from its peak gold but its percentage growth remains the
highest among this set of mid-tiers.
Here’s a comparable table
to the majors that shows percentage increases in gold production since 2000
or 2003:
Note that Barrick, in a
bid to end its decade-long production decline, announced its intent to
acquire successful mid-tier miner Randgold in late September.
Finally, let’s explore
how six new gold companies have increased gold production since founding from
2005 to 2011:
This is just a small
sampling of the enormous number of startup gold miners that have sprouted
since the mid-2000s. These six companies illustrate how the gold mining
business has evolved from a few behemoths in the early 2000s to a plethora of
leaner and meaner, small to mid-tier miners that grow production and can
become takeover or merger targets.
The bull market for gold
resulted in a significant increase in annual world gold production from 2008
at 2300 tonnes to 2017 at 3150 tonnes:
However, the following
chart illustrates the severe decline in production, i.e., peak gold, by the
six largest gold miners. This particular group of companies has gone steadily
downhill from an all-time high of 955 tonnes, or over 40% of world production
in 2006, to a multi-decade low of 705 tonnes, or 22.5% of world production in
2017.
So not only are majors
declining in the numbers of ounces (-26% over 12 years), they have also lost
a significant share of the world gold mining market (-18%):
We have shown that the
current narrative promulgated for peak gold applies to the major gold miners
only and not for the gold mining industry as a whole. That said, the data
presented above cover a relatively short time frame of 19 years: the end of a
bear market for gold (2000-2002); a long bull market cycle (2003-2012); a
relatively short but deep bear market (2013-2015); and a lower, range-bound
gold price over the past three years (2016-2018).
To fully assess the idea
of peak gold, I submit we must take a much longer term view and determine
what factors drive mining of the yellow metal.
According to the USGS,
world gold production increased from 386 tonnes in 1900 to 3150 tonnes in
2017. That is an eight times increase and an average gain of 1.8% per year:
Gold mine production has
increased more or less steadily for 117 years running albeit with several
relatively short perturbations on the downside due to wars, world
macroeconomics, and the price of gold.
Major world events that
affected the mining of gold include WWI, the Roaring ‘20s, Roosevelt’s dollar
devaluation that increased the price 70% during the depression in 1933, WWII,
a stagnant price post- WWII, discoveries in Nevada in the mid-1960s, Nixon’s
dollar devaluation in 1971 that floated the price of gold, the rapid rise in
prices from 1975 to 1980, widespread application of open pit mining and heap
leach-cyanide extraction around 1985, low prices from 1997-2002, and a robust
price briefly interrupted by the global economic crisis in 2008-2009.
The upward sloping
cumulative production curve illustrates how the above factors controlled the
mining of gold over longer time frames. This curve can be broken into five
distinct segments based on its slope:
·Cumulative production
increased systematically as a straight line from 1900 until 1933.
·Gold mining was
stimulated during the depression and production grew at an overall higher
rate thru the mid-1960s.
·A decades-long fixed
gold price provided little reason to develop new mines and gold production
dropped significantly then stagnated in the 1970s.
·An exponential increase
has occurred over the past 30 years and has been driven by higher prices and
new technologies that have facilitated large-scale bulk mining of much lower
grade material.
·There is an incipient
steepening slope from 2012-2016 although this may not be sustainable for reasons
outlined further on.
Also of note: cumulative
world mine production has doubled since the price of gold soared in 1979,
from 87,000 tonnes to 174,000 tonnes in 2017.
Gold has always served as
a store of wealth for civilized man. Because it is rare and valuable and does
not corrode or oxidize, about 98% of all the yellow metal that has been mined
throughout history is still available; i.e., it is nearly 100% recycled. Gold
hoarded in jewelry and bullion constitute about 85% of the cumulative world supply.
Because gold is mainly a
store of wealth and is not lost to industrial processes, waste streams, or
weathering, it is not subject to the inherent supply and demand fundamentals
that rule all the other precious and industrial metals.
That said, the mining of
all non-renewable natural resources is a business of depletion; exploration
for new deposits is required to replace mined reserves. Therefore, the most
important factor that affects future gold mine production is exploration.
Real world supply and fundamentals
are not pertinent for gold so the amount of money budgeted annually for
exploration is dependent almost solely on the current gold price. Of course,
the overall health and profitability of the gold mining industry is also
important but that is directly tied to the price of gold.
It really is a simple
formula:
·When the gold price is
low, little money is raised by juniors for exploration. Miners are not
profitable and they do not allocate money for exploration to replace
reserves.
·When the gold price is
high, money for exploration is readily available to juniors from a variety of
financial sources. Miners are profitable and budget money from operations for
exploration in order to replace reserves and write-off expenses to lower tax burdens.
We illustrate this idea
with a graph showing the annual world gold production (tonnes in blue)
and the yearly average gold price ($ in red) from 1993 to 2017:
The composite chart shows
that world gold mine production lags trends in the gold price by five or more
years. To wit:
·A gold price that
averaged $387 an ounce from 1986 to 1996 led to a surge in exploration
worldwide and was followed by a significant increase in mine production from
1995 to 2000.
·The gold price dropped
in 1997 with prices averaging less than $300 an ounce over the next six
years. Because scant money was spent on exploration from 1997 thru 2002 due
to low pricesand the Bre-X scandal, world production then fell drastically
from 2003 to 2008.
·The gold price recovered
in 2003 and a bull market for gold ensued with the price soaring from 2005 to
2012. Gold production bottomed in 2008 and from then thru 2017, gained 37%.
·From its high in 2012,
the annual average gold price dropped 30% by 2015 and has averaged about $100
above that low point over the past three years. Meanwhile, gold production
has continued on a 10-year upward trend.
·Moneys devoted to gold
exploration programs are down significantly over the past six years but gold
miners (excepting the majors) have increased output on a yearly basis.
Gold production reached
yet another all-time record at 3150 tonnes last year. Folks, that’s nearly 98
million ounces worth a whopping $123 billion at the 2017 price!
That said, a question
remains that only time can answer: Will gold production continue to rise or
will it drop over the next few years?
The six-year downturn in
exploration is strong reason to think that we are due for a respite in the
yearly growth of gold production. In fact, I fully expect it to happen.
But this predictable drop
in production does not in any way, shape, or form, constitute “peak gold”.
Just look at the long-term trend from 1900 to 2017 that shows world gold
production has grown steadily and relentlessly at 1.8% annually with few
perturbations.
Moreover, given the
rising world population and increasing standard of living, more and more
people can afford to own gold. It follows that demand for gold as a store of
wealth and a safe haven against financial calamity will also continue to
rise.
I am an unabashed
cornucopian (Mercenary Musing, March 19, 2012) and also a strong
proponent that past is prologue.
Therefore, I opine that
the current story of “peak gold” will follow the discarded idea of “peak oil”,
which was oh so popular with commodity pundits and talking heads from 2005 to
2011. I wonder where all those so-called experts are now?
And now, you too know why
peak gold is fake news.
Ciao for now,
Mickey Fulp
Mercenary Geologist
Acknowledgment: Troy McIntyre is the research
assistant for MercenaryGeologist.com.
The Mercenary Geologist
Michael S. “Mickey” Fulp is a Certified Professional Geologist with a
B.Sc. Earth Sciences with honor from the University of Tulsa, and M.Sc.
Geology from the University of New Mexico. Mickey has 35 years experience as
an exploration geologist and analyst searching for economic deposits of base
and precious metals, industrial minerals, uranium, coal, oil and gas, and
water in North and South America, Europe, and Asia.
Mickey worked
for junior explorers, major mining companies, private companies, and investors
as a consulting economic geologist for over 20 years, specializing in
geological mapping, property evaluation, and business development.In addition
to Mickey’s professional credentials and experience, he is high-altitude
proficient, and is bilingual in English and Spanish. From 2003 to 2006, he
made four outcrop ore discoveries in Peru, Nevada, Chile, and British
Columbia.
Mickey is
well-known and highly respected throughout the mining and exploration
community due to his ongoing work as an analyst, writer, and speaker.
Contact: Contact@MercenaryGeologist.com
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