The Greatest Gold Rush

Richard (Rick) Mills
Ahead of the Herd

Page 1 of 2

 

As a general rule, the most successful man in life is the man who has the best information

 

Here’s four facts I want you to have on your screen before we get going:

  1. Junior resource companies, not major mining companies, own the worlds future mines. Juniors already own, and find more of, what the world’s larger mining companies need to replace reserves and grow their asset base.
  2. Juniors are the ones most adept at finding these future mines.
  3. The gold mining industry needs to discover 90 million ounces of gold every year just to stay even.
  4. The junior exploration sector is presently in the midst of one of the worst financing environments ever experienced by the sector.

Discovery

 

Despite increased exploration expenditures, a record US$8b in 2011, gold ounce discovery is not keeping up to the rate needed to replace mined ounces. The Metals Economic Group estimates that the 99 significant discoveries (defined as greater than 2 mil oz) found between 1997 and 2011 replaced only 56 percent of the gold mined during that same period.

 

Costs

 

Gold ounce discovery is not keeping up, CAPEX and OPEX costs are escalating…

 

 

In 2001 and 2002 miners were producing gold for sub-$180 cash costs - the operational cost of the mine divided by the ounces of production. By 2005 cash costs had risen 45 percent to US$250. Data from GFMS shows world gold production costs for the first half of 2009 averaged $457/oz. Average cash costs in 2011 were US$657.  A complete breakdown of costs, an all-in cost figure, courtesy of CIBC, shows today’s average cash operating costs pegged at $700 an ounce.

 

Financing

 

Below is a chart I found over at The Charleston Voice website – it is the HUI expressed as a percentage of the gold price. By comparing the AMEX Gold Bugs Index (HUI) with the price of gold since 1998 they get a ratio that shows whether money flow is positive or negative for the mining sector. It shows quite clearly that money flows into miners is now very negative.

 

Charleston Voice

 

A Junior exploration company’s place in the food chain is to acquire and explore properties. Their job is to make the discoveries that the mid-tiers and majors takeover and turn into mines.

 

If exploration could only replace half the mined gold with record expenditures in 2011 and funding for exploration dropped by $9b from June 2011 to June 2012, and dropped drastically again from then till now, what’s in store for the future gold supply with even way less money for exploration today?

 

Historically, ownership of junior resource companies involved in the search for and development of precious metal deposits have offered the best leverage to rising metal prices - and they will again. Once the bullions all bought and allocated, once the market is setting gold’s price, once everyone knows mining is not going to replace even a small portion of future demand what’s going to happen?

 

Exactly – the shares in companies with advanced gold and silver projects are going to become very precious indeed.

 

Companies being considered for investment purposes should have all the following key attributes:

  • Established track record
  • Experienced and competent management teams
  • Established mineral resources
  • Projects in safe and stable jurisdictions of the world
  • Strategically located properties – existing infrastructure
  • Significant upside potential

But

 

Only you can decide the level of risk you can tolerate and how much patience you have to sit while developments, the story, plays out. It’s my opinion that a good entry point into the junior market would be a nearer term producer. Because these companies are well advanced along the development path a lot of the guesswork about grade, size, costs and metallurgy have been taken out of the equation for us.

 

 


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