Vancouver — “‘Tis not the gold, ’tis the seeking,” Robert Service poetically observed of the fever that gripped prospectors during the early days of the Klondike rush. More than a century later, the seekers are again out in full force as senior producers acknowledge they’re mining existing reserves faster than they can replace them.
Alex Davidson, executive vice-president of exploration for
Russell Edey, chairman of
“While new discoveries of gold are inherently unpredictable, no commentators are suggesting that growth in new mine production can continue at this level,” Edey told shareholders.
As if to drive home the point, Gold Survey 2005, the latest report from Gold Fields Mineral Services (GFMS), confirms that global gold production fell 5% last year to 79 million oz. — an 8-year low, and the biggest year-over-year drop since 1943.
The world’s three largest producers —
Next was
Compounding the problem of reserve depletion is relentless industry consolidation, which since the 1990s has placed 86% of gold production in the hands of nine senior companies, each of which produces at least a few million ounces (and up to 7 million oz.) annually.
Simply put, senior companies are collectively consuming at least a dozen multi-million-ounce gold deposits every year. It’s no industry secret that their collective discovery rate is considerably less impressive, at least lately.
At the same time, fewer juniors are exploring for gold than during the technology-driven prospecting boom of the 1980s and ’90s. A recent study by Metal Economics Group (MEG) estimates that the period from 1997 to 2003 “saw the demise of 39 significant mining and exploration companies through mergers and acquisitions, effectively erasing a cumulative US$433 million from worldwide exploration efforts during this period.”
The study shows that industry consolidation peaked in 2001; however, that 1-year period (from 2000 to 2001) cumulatively cut US$246 million from global exploration budgets, or more than half the overall decline in spending caused by acquisitions from 1997 to 2003.
As a result, the MEG study states that “large portions of the acquired companies’ budgets effectively disappeared in the years following the acquisitions, as the surviving companies’ budgets either remained the same as before the acquisitions or were reduced further despite incorporating an expanded exploration portfolio.”
The MEG study reveals that global exploration spending peaked at US$4.57 billion in 1997 and fell to a low of US$1.73 billion in 2002.
Spending is on the rise again, but of this year’s total budget of US$3.5 billion, only half is directed at gold. Base metals and even diamonds are giving gold a run for its money when it comes to attracting exploration dollars.
Juniors spending more
On a positive note, junior exploration spending doubled last year from 2003 levels, and is projected to climb again this year. Entrepreneurial juniors are back in the gold game, but because it takes years to advance grassroots projects to the prefeasibility stage, senior producers could face a dearth of discoveries and acquisition opportunities for years to come.
One obvious solution is for senior companies to beef up their exploration budgets, though the problem isn’t so simple. Huge “company-builder” deposits have become more difficult and expensive to find. As AngloGold Ashanti diplomatically understates, recent exploration efforts by major companies over the past decade have produced “generally modest” results.
Despite the billions spent on gold exploration in recent decades, the world’s dominant gold camps — Witwatersrand and Carlin — have no rivals as yet. South Africa and the U.S. are still the world’s top two gold producers, though production from both regions fell last year; to 9% in the case of South Africa and 7% in the U.S.
Output in South Africa has been in steady decline since the 1970s, when it peaked at 70% of world production. Falling grades and increasing costs and mine-depths are the main culprits, with grades dropping to slightly more than 4 grams gold per tonne in 2004 from 13 grams in 1968.
“To put this into perspective,” GFMS notes in its report, “South Africa mines 20% more rock [at deeper levels] than it did in 1969 in order to produce just one-third the amount of gold.”
Furthermore, production cash costs in South Africa have skyrocketed in recent years. Cash costs jumped to US$361 per oz. in 2004 from US$295 in 2003, while total costs rose to US$395 per oz. from US$315. (Globally, cash costs averaged US$253 last year, while total costs averaged US$313.)
While the stronger rand against the U.S. dollar was one factor (offset somewhat by robust gold prices), experts say the low-margin environment that now prevails in South Africa’s gold-mining industry is likely to worsen in the years ahead.
AngloGold Ashanti, South Africa’s largest producer, recorded a 6% drop in production last year. The company still boasts significant reserves and resources, though these too are in decline.
Resources fell 18% last year to an estimated 218.2 million oz., with the single largest reduction, 37.8 million oz. at Western Ultra Deep Levels, resulting from a scoping study that showed these resources were no longer economic in light of capital requirements and current production costs.
At the end of 2004, AngloGold’s reserves stood at 78.9 million oz., enough for more than a dozen years of production at current rates (excluding new discoveries and conversions of resources into reserves).
Nevada, which accounts for 83% of America’s gold output, saw a 4% drop in production last year, again mostly because of declining grades. At Barrick’s Nevada operations, for example, a 20% drop in average grades last year translated into a 20% drop in gold production.
Even so, Barrick’s reserves grew 4% last year to 89 million oz., with 47% of that represented by advanced projects in South America, and 27% by North American projects. However, of the 5 million oz. produced in 2004, 60% came from North America (that is, Nevada) while only 13% came from South America.
Barrick’s changing reserve picture is evidenced by five development projects that collectively contain 43 million oz. gold. Of this total, 25.4 million oz. are in four geographically diverse deposits: Lagunas Norte (9.1 million oz.) in Peru; Veladero (12.8 million oz.) in Argentina; Cowal (2.5 million oz.) in Australia; and Archimedes (1 million oz.) in Nevada. Next comes the monster Pascua-Lama project (17.6 million oz.) in high-altitude terrain straddling the Chile-Argentine border. These new mines are expected to boost Barrick’s production 40% over 2004 levels, which means reserve replacement will be an even greater challenge in the years ahead.
Newmont’s production fell 5% to 7 million equity oz. last year, again mostly because of lower grades and increased stripping at its Nevada operations. North America accounted for 39% of Newmont’s production last year, as well as 38% of its global reserves.
Based on current trends, GFMS predicts global mine supply will decline by about a m
illion ounces each year for the next five years, and reach 79 million oz. by 2010.
This “base-case” assessment was predicated on more than 50 new projects in the feasibility-stage category; however, GFMS notes that not all are certain to be placed into production. Various permitting, political, and financing complications could stall or delay development of a number of these.
The spectre of reserve depletion has the gold industry scouring the globe for the next generation of “world class” mines. So far at least, South America appears to be a favoured regional destination, accounting for fully a third of the total tonnage of pipeline gold supply. But with the exception of the Brisas and Las Cristinas gold deposits in Venezuela, most of the new projects are in Peru or Chile/Argentina and owned or controlled by senior companies.
The world’s top three gold companies have all beefed up their exploration budgets. Newmont spent US$115 million in 2003 and US$192.4 million last year, and plans to spend as much as US$200 million in 2005.
The company is looking in all the usual places for growth, with Africa poised to become its newest mining district. Two advanced projects in Ghana — Ahafo and Akyem — collectively host 16 million oz. gold and are poised to start producing next year. The company also has intensified exploration and development efforts in Australia.
Barrick diversifies
Barrick now holds 100 exploration projects in 16 countries. Spending will increase to US$120 million this year from US$95 million in 2004.
Barrick has always looked to juniors for growth, and that strategy continues today, even with fewer players in the game. The company recently secured minor equity interests in juniors exploring prospective gold properties in Russia, Kazakstan, Mongolia and Turkey.
Barrick picked up a 13.8% interest in AIM-listed
AngloGold Ashanti has adopted a “new frontiers” strategy in its efforts to find “tomorrow’s production ounces,” which means looking for exploration and acquisition opportunities outside of the world’s recognized and mature gold regions. Part of that strategy entails shedding properties deemed unlikely to provide returns on investment.
The company has enjoyed particular success in Mali, where it holds interests in three gold mines (Sadiola Hill, Morila and Yatela), as well as various exploration prospects.
As for “new frontiers,” AngloGold Ashanti is keeping a close eye on junior companies working in prospective districts that are relatively unexplored because of political unrest or economic uncertainty.
The company recently acquired an interest in London-based
Last year AngloGold Ashanti announced several joint ventures, giving it exposure to gold properties in Laos and the Philippines. It also picked up ground in several prospective areas of Mongolia.
A riskier venture is the company’s exploration and drilling program in the gold-rich Ituri district in volatile Democratic Republic of Congo.
Like AngloGold Ashanti,
Senior gold companies are under increased pressure to replace and find new reserves and resources; as a result, gold-seeking appears to be more focused on geologic terranes that could potentially host large and significant deposits.
Among the favoored targets are “Carlin-type” deposits, even as debate continues about the specific characteristics of this deposit type, and where and how to find them outside of Nevada. China is believed to have good potential for Carlin-type deposits, which helps explain why the nation saw a 350% increase in exploration spending last year: US$86 million in total, compared with US$19 million in 2003.
Russia offers good potential for major deposits too, and recently took steps to improve its often-murky rules and regulations for investors. On the other hand, the country saw fit to limit foreign participation in certain “strategic” assets to 49%, including Sukhoi Log, its largest, undeveloped gold deposit.
Orogenic gold deposits in Archean greenstone belts, slate belts and Cordilleran-style orogenic belts are gaining attention, as this deposit type, on a global scale, has production and resources that are estimated to exceed 1 billion oz. gold.
This class of gold deposit is characteristically associated with deformed and metamorphosed mid-crustal blocks, particularly in spatial association with major crustal structures. Most of the largest gold deposits in Canada, Australia and West Africa are of this type.
Canadian government geologists have long argued that the Superior Province is the world’s largest and best-preserved Archean craton in terms of gold endowment, followed by the Yilgarn craton of Australia. The perception is that both Canada and Australia are over-explored, relative to similar terranes elsewhere in the world, yet these nations were the most-favoured country destinations for global exploration spending last year (even though Latin American nations cumulatively took the regional lead). Canada took top spot at 27.5%, while Australia attracted 20.6%.
And with half the spending directed to gold, odds are that at least some of the new gold mines of tomorrow may come from the gold camps of the past.
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