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Welcome to USAGOLD's "Gilded Opinion" pages. We invite you to browse our index of outstanding gold-based commentary.
Where have all the projects
gone!
by Professor von Braun
January 8th, 2006
Recent acquisition and merger activity among the larger mining
companies highlights the often-referenced shortage of additional
gold reserves and resources. The price paid by Goldcorp for Virginia
Gold (estimated to be between $140 to $200 per ounce), does set
a new benchmark for the acquisition price of these reserves, considerably
higher than the $35 - $40 figure recognized as the average cost
per ounce during the mid 1990's.
Adding Placer Dome to a list of mining companies that no longer
exist, such as Sante Fe Gold, Homestake, Getchell Gold, Echo Bay,
Pegasus, Normandy, Franco Nevada, Amax Gold, Cyprus, St Joe Gold,
Lac Minerals -- to name a few, highlights another aspect of the
gold mining industry which is a shortage of players.
What with declining annual production, several years of low gold
prices, diminishing exploration budgets, the laying off of exploration
geologists, and little incentive during the price decline into
2001 to do other than maintain their quarterly forecast, mining
companies have not had it easy.
The associated support industries did not have a cause for celebration
during these years either. Whether it was mining analysts, gold
fund managers, technical consultants, retail investors, or exploration
companies, all had a difficult row to hoe during that time.
The exploration boom of the early 1980's followed the run up in
the gold price that peaked in 1980, essentially a nine-year rally,
followed by a 21-year decline. However the landscape was a lot
different in the 1980's when compared to now. Mining companies
were actively looking for projects, geologists were fully employed
and some companies such as Sante Fe Gold and St. Joe Gold had
very good exploration teams, Homestake was active, and spending
money on exploration was considered to be a priority. If one company
lost interest in a project, the project owner only had to pick
up the phone and another would be knocking on his door.
So where are we now when it comes to investor interest, exploration
activity, more viable support industries, and a general awareness
of what this industry is and how it works?
What has changed between 1981 and 2006? Well for starters all
of us are 25 years older and exploration geologists then in their
forties are now in their sixties, many having retired. I recall
one major mining company in 2001 that laid off any geologist over
the age of fifty -- I kid you not, that was the 'official' policy
at the time. Every merger and outright acquisition by the remaining
players in the ever shrinking mining industry that has occurred
has shrunk the exploration teams, the databases and the actual
activity of feet on the ground looking at rocks, which is of course
where exploration starts. Databases and the people who put them
together were trashed, literally, in many cases turned into pink
slips and trash cans. Records of the results of substantial amounts
of money spent on field work, sampling, mapping and drilling were
in many cases disposed of via the company dumpster, in some cases
later rescued by geologists who understood the value of it; in
other cases it simply disappeared.
The idea that there is a shortage of mining projects is more the
result of the short-sightedness of the industry itself over several
years. There is rather both a shortage of exploration expertise
and of the corporate and investor culture that supports them.
In addition there is little retail investor interest and stock
market support for junior mining companies when compared with
the boom period of the early 1980's.
In recent conversations I have had with people knowledgeable about
the industry, several things have been highlighted. The current
mindset of the majors is institutional investor orientated. The
criteria that the mutual fund managers have, when it comes to
gold stock ownership is such that in many cases it precludes ownership
of both junior and mid size companies thereby depriving these
companies of funding. Having such requirements as 'x' amount of
production and 'y' amount of market capitalization may seem to
make sense to these managers of other peoples money (which is
of course a far larger industry and subsequently a source of funding,
than it was in the mid-eighties,) but it also demonstrates a lack
of understanding of how the mining industry works. No doubt much
of their decision making is computer-assisted with cash-flow models
and projections, but when it comes to reserve replacement I suspect
their computers fall short.
A mining analyst who covers several of the mid-sized companies
told me of a conversation he had with a fund manager who was looking
to invest his client's funds in gold mining companies (where was
he in 2001?). This gentleman then went on to outline his criteria
which excluded most of the companies this analyst covered.
In a recent discussion with a geologist friend of mine, one who
has a couple of good discoveries to his name, he mentioned that
this was the strangest looking bull market he had ever seen, and
wanted to know if I could help him out on this observation of
his. Actual on the ground activity was at no higher level now
that it had been for several years yet he had received a couple
of calls from brokers wanting to know who was up to what when
it came to drilling and current exploration. He also made the
same observation, that there is not a shortage of projects, but
there is a shortage of both funding for exploration development
as well as a shortage of experienced personal.
The Goldcorp website is a useful source of some rather surprising
information. Under the section entitled analyst coverage
there is a list of 25 financial institutions and the respective
analysts that cover the company. Of the 25 analysts, 18 are based
in Toronto and 4 in New York. What does that tell you about the
level of interest from the US-based investor community, both institutional
and retail when it comes to the gold mining industry? Apart from
JP Morgan, most of the US based investment houses are conspicuous
by their absence from this list.
In another discussion with a Canadian mining consultant, one familiar
with this industry over many years, he agreed that both mining
and investor expertise were in short supply on the US side of
the border. While the US is still touted as a substantial gold
producer most of that production is either Canadian owned or Canadian
financed. Much of the gold production coming out of South America
is also Canadian owned.
Recent comments by people such as Richard Russell (ww1.Dowtheoryletters.com)
that the general investing public are clueless when it comes to
the gold market, or by Bill Murphy (at www.lemetropolecafé.com)
that the Wall Street crowd are brain dead when it comes to investing
in gold and gold mining are obviously on the mark. These comments
also bode well for an ongoing increase in both the price of the
metal and the price of gold stocks. While I see reports by US
based commentators of the bullish consensus on gold being at record
levels (90%+) it is not showing up in the areas where one would
expect it. This is a bullmarket that's over-bought??? Over-bought
by whom?!
While good money will be made in gold stocks in the years to come
as the gold price readjusts itself to levels that reflect the
debasing of paper currencies, the degree to which the currencies
have been debased is far from being reflected at current gold
price levels.
Gold came first, many years ago as the preferred medium of exchange,
paper followed and gold does tend to play the catch up game, evidence
President Roosevelt's revaluation of the 'official' price of gold
in 1934, or the increase in price through the 1970's from $35
to $850. For those readers interested in the astrological significance
of this period in relation to past events that relate to gold
I recommend the 2006 preview by noted astrologer Richard Nolle
available online at www.astropro.com in the futures section.
As the gold price rises the price paid by mining companies for
in-ground reserves will also continue to rise and for those astute
investors now is the time to be looking at companies that have
sizable land positions with excellent potential to prove up additional
reserves. They are out there, in some cases hold overs from the
nineties, companies that had their exploration and development
activities curtailed as the market dried up and yet have kept
their property position intact. It is likely, given where we are
at, very early days in a bullmarket in all commodities with gold
being one of the slow movers to date, that the real money will
be made in reserve acquisitions by the additional reserve short
miners under pressure from institutional shareholders who understand
little about the industry they are investing in. Finding gold
ounces at a cost of $20 per ounce or less and selling for $200
per ounce is after all a good return but with gold at even higher
levels what will the purchase price of this rather crucial ingredient
then be?
The Prof can be contacted by email at profvonb2@aol.com
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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