Canada shows dismal record for return on gold

Recent reflections on exploration success in this country have shattered the perception that, given some money and a little luck, a seasoned prospector has a good chance of finding an economic gold deposit under Canadian soil.

Although far more was spent on exploration in Canada than in any other Western World country from 1983-88, only three gold camps — Casa Berardi, Bousquet, and Eskay Creek — emerged as commercially viable ventures. So in order for Canada to economically justify the US$3-billion exploration bill for this period, gold would have to trade at no less than US$665 per oz., concludes the Centre for Resource Studies (CRS) in a recent report entitled Worldwide Trends in Gold Exploration.

Even for the 1969-82 study period, before government incentives boosted exploration expenditures, the minimum acceptable price required to yield a 10% return on investment in gold exploration is US$395 per oz., the report calculates. Gold recently traded at US$338.

“The breakeven price findings for gold exploration in Canada . . . point to the uneconomic, wealth-destroying character of this endeavor,” say authors Brian Mackenzie and Michael Doggett. “Gold exploration in Canada is found to be a decidedly uneconomic activity overall.”

Compared with Australia and Brazil, where the expected rate of return on gold exploration investment is 18% and 19% respectively, Canada offers a rate of return of only 4% for the 1969-88 period. According to the report, the cost of finding an ounce of gold ranges from US$15 in South Africa to US$35 in Australia but jumps to US$65 in Canada.

“I don’t believe a word of it,” Fenton Scott, president of the Prospectors and Developers Association of Canada, says of the CRS report.” Scott says the Canadian exploration data used by the CRS are about 25% higher than actual expenditures. Using the Dome mine at Timmins, Ont., as an example, he adds that reserves of Canadian vein-type deposits, which tend to extend at depth, are usually underestimated at startup.

(For years since it started operating in 1909, the Dome deposit was estimated to contain about 2-3 years of reserves, yet it is still producing at a rate of about 145,000 oz. per year.)

He also points out that while most deposits in Australia and the U.S. can be evaluated from surface, Canadians almost always have to complete expensive underground exploration before a production decision can be made. Energy, Mines and Resources (EMR) is willing to concede that the number of quality gold deposits found in the 1980s does not justify the amount spent on exploration. “Few Canadian gold discoveries of the 1980s appear to be especially significant and few prospective new gold mines are now in sight,” wrote Donald Cranstone, the EMR Mineral Policy Sector’s senior exploration economist, in The Northern Miner Magazine

recently.

Easy access to flow-through exploration dollars is largely to blame for gold exploration’s dismal rate of return during the 1980s. In a race to meet the expenditure deadlines dictated by flow-through financing, companies routinely threw money at second rate projects.

“Often, there was not enough work done before a decision was made to go into production,” says David James, a gold mining analyst for Richardson Greenshields. “Projects were `fast-tracked’ — probably the worst word to use in the mining business.”

By 1989, when the government finally removed the special tax incentives, Canada’s gold companies found themselves with more than 30 failed development projects on their hands, for example, Magnacon, Ketza River, Puffy Lake and Musselwhite.

“It’s certainly no coincidence that some of the deterioration in the economics of gold exploration are associated with the period between 1983 and 1988,” Mackenzie told The Northern Miner.

But Mackenzie says his findings are related to a combination of complex factors that require further study, including changes in geological concepts, depletion-exhaustion effects and economic trends.

In a presentation to the Canadian Institute of Mining, Metallurgy and Petroleum almost two years ago, Curragh Resources’ (TSE) Graham Clow blamed the lack of technical knowledge for the gold mine failures in the 1980s. “From our observations, a number of common factors have emerged and they are all traceable to inexperienced mining professionals,” said Clow, currently general manager of the Sa Dena Hes and Stronsay operations. “To say that technical people were ill-prepared is an understatement.”

Cranstone adds that the gold price has fallen considerably since some of the projects were in the grassroots exploration stage. “Deposits that might have made mines with gold at $500 to $600 an oz. are not viable orebodies at today’s $404 an oz.”

But whatever the reasons behind it, Canada’s poor track record, among other things, is driving exploration dollars out of the country. Preliminary EMR figures suggest that annual exploration expenditures in Canada dropped by more than 30% last year to $550 million, or less than half the $1.4 billion spent in 1988.

Meanwhile, Canadian companies are increasing their presence in Latin America, Africa and the South Pacific. “The increasingly difficult environmental constraints and high relative tax rates make a growing number of third world countries much more attractive logistically and economically,” says James. And for those who maintain exploration offices in Canada, the focus is gradually shifting from gold to base metals. In 1990, expenditures on precious metal exploration dropped to 58% of total expenditures, down from 67% in 1989 while base metal expenditures jumped from 23% to 30%. That trend continued in 1991.