Rising global gold output expected to ease by end of 1990s (June 18, 1990)

Pierre Lassonde, the president of Franco-Nevada Mining turned author, takes a look at the 1990s in this excerpt from his new book on the gold (and silver) industry, The Gold Book, published by Financial Times of Canada and Penguin Books Canada. As the law of diminishing returns takes hold, you can expect the rate of increase in discoveries and production to slow down considerably. Much of the gold that has been found in the past 10 years has been in a form that our predecessors in the 1920s and 1930s could not see or did not have the technical capability to mine or mill at a profit. In the past 20 years the mining industry has developed the heap leaching process to recover gold from a very low grade material; it has developed the autoclaving system to crack the toughest ore where the gold is encapsulated in the sulphide material; and it has perfected the roasting system to protect the environment. Mining equipment — even shovels and trucks — is much bigger, making open pit mining more efficient. Automation has increased the size and capacity of underground equipment and remote control operation has made it safer. Impressive strides have been taken, but we are reaching the limit of these new technical innovations. The same is true of the exploration methods that we are using. From raw prospecting, the industry has gone into the sky with remote sensing to find deposits and the industry has developed sophisticated geophysical and geochemical techniques that were not available even five or 10 years ago. Again, we are getting closer and closer to the limit of current technology where the knowledge curve starts to flatten out and the law of diminishing returns starts to apply.

In North America, the rate of new discoveries has already started to flatten. Production will probably peak some time in the mid-1990s. By 1995, North American annual gold production could reach 17.7 million oz. more than five times production in 1980. The problem, of course, will be to replace reserves as they are mined out. Once it has peaked, production will probably stay on a plateau until the turn of the century when it will begin to decrease slowly.

In Australia, the small, close-to- the-surface deposits that have already been discovered are being mined quickly. The underground sulphide deposits are likely to require more advanced technology than is currently available to the industry. Therefore, it is likely that both the rate of discoveries and production will peak earlier than in North America and begin to fall by the mid-1990s.

Papua New Guinea and Indonesia are underexplored and are extremely fertile for large gold deposits. The rate of discovery in this region could continue to increase through the 1990s. The main question, however, will be the extent to which these discoveries will actually come into production. Capital costs will be exceedingly high because the gold deposits are in remote areas where no modern infrastructure of any kind exists. There is also risk of political instability. Ultimately, the extensive gold reserves of these countries will be mined since their development will be beneficial to the countries themselves. However, there will be delays.

In South America, Brazil’s production has already peaked. Its large placer deposits are fast being depleted by the garimpeiros and there are few rivers or known deposits left untouched. The country now has to make the transition to hard rock mining and it is ill-prepared to do so. Extremely restrictive foreign exchange controls and deteriorating economic conditions discourage investments in the gold industry by foreign producers while the country itself does not have the capability to exploit its own natural resources.

In Chile, the so-called Switzerland of South America, gold production is on the increase as dozens of multinational gold companies provide money and people because both the investment climate and the geology of the country are favorable. Chile will probably see more large discoveries and, barring a change in government and economic policies, it should continue to increase gold production through the 1990s.

On the other hand, Peru, despite its rich mining history and incredibly generous geology, will probably continue its downward march in production as the ongoing civil war and government policies, or lack of policies, starve the mines of capital and people. Two other countries that are likely to increase production in South America are Bolivia and Uruguay, but they will not become significant in global production. Overall, production in South America is likely to peak by the mid- 1990s, along with North America, and sit on a plateau until the end of the 1990s.

Most of Africa has been bypassed by the 1980s boom in gold exploration as companies have avoided war-torn countries like Mozambique and Namibia and the communist-led or dictatorial regimes in Zaire, Zambia, Ghana and Nigeria. Slowly but surely Africa is realizing that it has been sinking deeper into poverty by closing its door on private investment and democracy. We are seeing the tide turn and countries that have a rich history in gold mining, such as Ghana, are now looking to foreign investors to help them regain some of the past glories. Africa is rich in mineral wealth, gold in particular. Given the recent trend toward democratization and a return to capitalism, small improvements throughout the 1990s in production in Africa can be expected, although they will not be dramatic.

In Eastern Europe and the Soviet Union, the recent freedom and moves toward democracy bode well for trade between the east and the west. Eastern European governments will probably make gold mining a priority because of the hard currency gold can bring into the country. The Soviet Union, in particular, which is lagging in the application of new gold-mining technology, could easily boost production over the next 10 years. The only question is whether there will be opportunities for North American gold mining companies to participate in the development of these reserves.

Finally, there is South Africa. Production in this gold-rich country has been falling for over 10 years but could begin to stabilize as new mines are brought into production to compensate for the exhausted mines that will have to close in the 1990s. The South African gold mining industry will have to improve its productivity through the 1990s to maintain its share of global production in the face of stiff competition from the lower cost open pit mines of North America and the Pacific Rim. It is unlikely, however, that the country will ever regain its position as the country of the lowest cost producer.

Overall, we can look to the 1990s as a time of historically high gold production. As these record levels of production are achieved, it will become more and more apparent that it will be difficult to replace reserves. If history repeats itself, by the turn of the century worldwide production will have already started to fall.

For gold mining companies, the trend described above means two things. First, as the rate of new discoveries tapers off, companies will find fewer opportunities to spend wisely on exploration and development. Second, as known deposits are brought into production the demand for capital will lessen — which, in turn, will provide companies with increasing cash flow. Of course, not all companies will benefit to the same degree. Companies that have made major capital expenditures to bring their mines into production will enjoy a much faster cash flow than those that will require reinvestment into the early to mid-1990s.

Pierre Lassonde, the president of Franco-Nevada Mining turned author, takes a look at the 1990s in this excerpt from his new book on the gold (and silver) industry, The Gold Book, published by Financial Times of Canada and Penguin Books Canada. As the law of diminishing returns takes hold, you can expect the rate of increase in discoveries and production to slow down considerably. Much of the gold that has been found in the past 10 years has been in a form that our predecessors in the 1920s and 1930s could not see or did not have the technical capability to mine or mill at a profit. In the past 20 years the mining industry has developed the heap leaching process to recover gold from a very low grade material; it has developed the autoclaving system to crack the toughest ore where the gold is encapsulated in the sulphide material; and it has perfected the roasting system to protect the environment. Mining equipment — even shovels and trucks — is much bigger, making open pit mining more efficient. Automation has increased the size and capacity of underground equipment and remote control operation has made it safer. Impressive strides have been taken, but we are reaching the limit of these new technical innovations. The same is true of the exploration methods that we are using. From raw prospecting, the industry has gone into the sky with remote sensing to find deposits and the industry has developed sophisticated geophysical and geochemical techniques that were not available even five or 10 years ago. Again, we are getting closer and closer to the limit of current technology where the knowledge curve starts to flatten out and the law of diminishing returns starts to apply.

In North America, the rate of new discoveries has already started to flatten. Production will probably peak some time in the mid-1990s. By 1995, North American annual gold production could reach 17.7 million oz. more than five times production in 1980. The problem, of course, will be to replace reserves as they are mined out. Once it has peaked, production will probably stay on a plateau until the turn of the century when it will begin to decrease slowly.

In Australia, the small, close-to- the-surface deposits that have already been discovered are being mined quickly. The underground sulphide deposits are likely to require more advanced technology than is currently available to the industry. Therefore, it is likely that both the rate of discoveries and production will peak earlier than in North America and begin to fall by the mid-1990s.

Papua New Guinea and Indonesia are underexplored and are extremely fertile for large gold deposits. The rate of discovery in this region could continue to increase through the 1990s. The main question, however, will be the extent to which these discoveries will actually come into production. Capital costs will be exceedingly high because the gold deposits are in remote areas where no modern infrastructure of any kind exists. There is also risk of political instability. Ultimately, the extensive gold reserves of these countries will be mined since their development will be beneficial to the countries themselves. However, there will be delays.

In South America, Brazil’s production has already peaked. Its large placer deposits are fast being depleted by the garimpeiros and there are few rivers or known deposits left untouched. The country now has to make the transition to hard rock mining and it is ill-prepared to do so. Extremely restrictive foreign exchange controls and deteriorating economic conditions discourage investments in the gold industry by foreign producers while the country itself does not have the capability to exploit its own natural resources.

In Chile, the so-called Switzerland of South America, gold production is on the increase as dozens of multinational gold companies provide money and people because both the investment climate and the geology of the country are favorable. Chile will probably see more large discoveries and, barring a change in government and economic policies, it should continue to increase gold production through the 1990s.

On the other hand, Peru, despite its rich mining history and incredibly generous geology, will probably continue its downward march in production as the ongoing civil war and government policies, or lack of policies, starve the mines of capital and people. Two other countries that are likely to increase production in South America are Bolivia and Uruguay, but they will not become significant in global production. Overall, production in South America is likely to peak by the mid- 1990s, along with North America, and sit on a plateau until the end of the 1990s.

Most of Africa has been bypassed by the 1980s boom in gold exploration as companies have avoided war-torn countries like Mozambique and Namibia and the communist-led or dictatorial regimes in Zaire, Zambia, Ghana and Nigeria. Slowly but surely Africa is realizing that it has been sinking deeper into poverty by closing its door on private investment and democracy. We are seeing the tide turn and countries that have a rich history in gold mining, such as Ghana, are now looking to foreign investors to help them regain some of the past glories. Africa is rich in mineral wealth, gold in particular. Given the recent trend toward democratization and a return to capitalism, small improvements throughout the 1990s in production in Africa can be expected, although they will not be dramatic.

In Eastern Europe and the Soviet Union, the recent freedom and moves toward democracy bode well for trade between the east and the west. Eastern European governments will probably make gold mining a priority because of the hard currency gold can bring into the country. The Soviet Union, in particular, which is lagging in the application of new gold-mining technology, could easily boost production over the next 10 years. The only question is whether there will be opportunities for North American gold mining companies to participate in the development of these reserves.

Finally, there is South Africa. Production in this gold-rich country has been falling for over 10 years but could begin to stabilize as new mines are brought into production to compensate for the exhausted mines that will have to close in the 1990s. The South African gold mining industry will have to improve its productivity through the 1990s to maintain its share of global production in the face of stiff competition from the lower cost open pit mines of North America and the Pacific Rim. It is unlikely, however, that the country will ever regain its position as the country of the lowest cost producer.

Overall, we can look to the 1990s as a time of historically high gold production. As these record levels of production are achieved, it will become more and more apparent that it will be difficult to replace reserves. If history repeats itself, by the turn of the century worldwide production will have already started to fall.

For gold mining companies, the trend described above means two things. First, as the rate of new discoveries tapers off, companies will find fewer opportunities to spend wisely on exploration and development. Second, as known deposits are brought into production the demand for capital will lessen — which, in turn, will provide companies with increasing cash flow. Of course, not all companies will benefit to the same degree. Companies that have made major capital expenditures to bring their mines into production will enjoy a much faster cash flow than those that will require reinvestment into the early to mid-1990s.