Color Outside the Line

Richard (Rick) Mills
Ahead of the Herd

Page 1 of 5

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

 

Mining is an extremely capital intensive business for two reasons. Firstly mining has a large, up front layout of construction capital called Capex - the costs associated with the development and construction of open-pit and underground mines. There are often other company built infrastructure assets like roads, railways, bridges, power generating stations and seaports to facilitate extraction and shipping of ore and concentrate.

 

Capex costs are escalating because:

  • Declining ore grades means a much larger relative scale of required mining and milling operations
  • A growing proportion of mining projects are in remote areas of developing economies where there’s little to no existing infrastructure

There is also continuously rising Opex, or operational expenditures, to consider. These are the day to day costs of operation; rubber tires, wages, fuel, camp costs for employees etc.

 

The bottom line? It is becoming increasingly expensive to bring new mines on line and run them.

 

The reasons behind flat-lining gold production, and record cash and all-in costs, are numerous:

  • Production declines in mature mining areas
  • Slower than expected ramp-ups of output
  • Development time up
  • The entire resource extraction industry suffers from a lack of skilled people
  • Extreme weather
  • Labor strikes
  • Protests
  • Increasingly more remote and lacking in infrastructure projects
  • Higher capex costs
  • Increased resource nationalism
  • Increased environmental regulation
  • More complex metallurgy
  • Lower cutoff grades

In 1998 the world’s top two highest grade mines were SMM’s Hishikari Mine in Japan @ 50g/t and Barrick’s Meikle mine in the U.S. @ 32g/t. In 2011 the world’s top two highest grade mines were Newcrest’s Gosowong in Indonesia @ 25g/t and goldcorp’s Red Lake mine in Canada @ 24g/t.

 

In 2014 Klondex Mines Fire Creek Mine in the U.S. was the world’s highest grade mine @ 44g/t and coming in second place was Kirkland Lakes Macassa Mine in Canada @ 22g/t. Declining mined and mineable gold grade is a direct result of the industry’s inability to discover new high grade/high margin deposits.

 

Goldman Sachs Eugene King published a report earlier this year (2015) warning of Peak gold. Since gold production lags discoveries by around 20 years the following chart suggests he may be right.

 

 

Here’s some excellent insight from Brent Cook, explorationinsights.com.

 

“Major gold mining companies are facing a big problem. They are unable to find and develop enough ounces to keep up with demand, for the simple fact that economic gold deposits are extremely rare.”

 

There are three main reasons why gold production increased up to 2000 despite declining gold prices.

  • The first is the advent of new mining and processing technologies that made previously uneconomic low grade deposits economic. This was mostly a result of heap leach technology and bulk mining methods. Meaning, mining companies could now scrape up large areas of low grade mineralization and sprinkle a cheap solution of cyanide on the rock to recover the gold. This primarily worked on near surface oxidized deposits in relatively dry climates.
  • The second is that vast regions of the world that had previously been closed for various reasons were opened up to exploration. These new areas include much of Latin America, Africa, and the former Soviet Union.
  • The third is that geologists had a whole slew of new exploration tools with which to scan the earth. These include satellite imagery, geophysics, and more sensitive chemical tools.

The net result was that new technologies kept old deposits going longer and made previously uneconomic ones viable, thereby ramping up production into the early 90’s. New deposits in previously unexplored and off-limits areas kept that production going until about 2000. All well and good but the industry is not finding as many new deposits as they need to in order to maintain current production levels. And, although we can expect incremental technological improvements in processing, mining, and exploration, there is nothing revolutionary on the horizon.

 

This is a worrisome slide for major gold producers—they are unable to sustain themselves. For the most part they are surviving via old deposits that are running out of ore and newer deposits that are quickly headed into the “old” deposit category. Reserves from these aging deposits are not being replaced by new discoveries. Producers’ problems are further exacerbated by rising exploration and development costs, plus the significant time it now takes to permit and finance a new deposit.”

 

 


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