Last week I saw an article in MineWeb, “The end of gold cash costs as we know them?”, which noted recent calls for an “all-in sustaining cash cost” measure that “…more fully defines the total costs associated with producing gold. All-in sustaining cash costs include by product cash costs, sustaining capital, corporate general and administrative expenses and exploration expense.” “By excluding things like sustaining capital expenditure and the outlay for new projects, gold companies have provided the market with artificially low cost numbers which made them look better when gold prices were low and no-one was really making a lot of money.” In other words, pe ratios pulled out of the nether regions.
The demand for the mining industry to develop metrics that include exploration costs prompted me to look at a few recent figures about gold production, supply, and exploration.
Of 165,000 metric tons mined worldwide as of 2010, only 24,000 metric tons were mined before the 20th Century. There was a steady increase during the 20th Century, peaking in 2001, but it has been wavering around 2,200-2,500 tons per year since then. So actual gold production is about as high now as it has ever been in history. Here’s a handy graph illustrating this from Numbersleuth.org:
Of course there is a finite supply of gold in the world, but an infinite amount of speculation on how much remains. There was an interesting infographic about it published last November by Natural Resource Holdings/Visual Capitalist. Natural Resource Holdings is an investment company focused on natural resources, so although I’m no expert, I would speculate they have a vested interest in depicting resources as dwindling. In their analysis, they considered only 1 million+ ounce deposits to be “significant.” Given this criterion, China is not considered to have any of the top 50 top-producing significant deposits, despite being the world’s top producer of gold! There’s a lot of other interesting numbers in there, but that conclusion alone suggests their methodology is somewhat suspect. Those supposedly insignificant deposits China has must be mighty productive.
The other problem with this estimate is the same as those of world’s petroleum supply: it is based on in-situ (known but undeveloped) deposits. So as an estimate of the world’s supply, this is inadequate unless you believe exploration will cease, and/or no further “significant” deposits will ever be found. I don’t believe that for a minute.
I recently heard the statement, “less gold is found every year.” It’s hard for your average member of the hoi polloi like me to get good numbers on that. While it’s increasingly more expensive to find, it’s also more profitible once discovered. There was an interesting report published in 2012 by the Metal Economics Group that had this to say about exploration:
“[A]ll companies have responded [to higher metals prices] by increasing their exploration budgets over the past two years. As a result, the industry’s aggregate exploration total jumped 44% in 2010 and a further 50% in 2011, more than doubling from 2009’s recent low of $8.4 billion to the new all-time high of $18.2 billion in 2011.”
“Compared with the lows of late 2008 and early 2009, when most companies avoided risk and focused their exploration dollars on their existing, more advanced deposits, 2011 saw a rebound in the number of initial finds, new zones, and satellite deposits, as well as from work on expanding existing resources.”
“Gold, copper, and silver accounted for 92% of the significant precious and base metals drill results in 2011. The regional distribution of results …[showed] good levels of success in West Africa and Colombia (gold) … Canada and Australia … also had very good numbers for both gold and base metals, exemplifying the value of ease of access to prospective land—both geographically and politically. The relative lack of significant results throughout mainland Asia—considered some of the most prospective and underexplored terrain on the globe—demonstrates that regardless of geology, many [companies] are still hesitant to seriously explore in countries that historically have not protected their long-term interests.”
That last bit certainly explains the paucity of data on China! What exactly is meant by “good levels of success” is anyone’s guess (unless you pay for access to their database), but in terms of Return On Investment, “good” surely cannot mean finds worth less than the money spent to explore them, and that was at an all-time high in 2011. The question today is what happens to exploration budgets while metal prices remain flat, production costs rise, and governments worldwide cast about for new sources of revenue (tax).
In any case, these data seem to be limited to land exploration, and that will be less than half of the picture in the near future. Most of the world is covered by water, and the technology to enable the exploration and mining of undersea resources is only now becoming available. (See the recent article “Gold Rush in the Abyss: Vast Deposits of Gold and Other Ores Lure Seabed Miners,” NY Times, July 2012.) That’s the real reason why the craptastic Law of the Sea Treaty (LOST) is being advocated – it would grant sovereignty over the world’s oceans and all their resources to the UN. The UN, via the International Seabed Authority, would regulate and tax potentially over half the world’s mineral resources, no doubt with accompanying price-fixing, kickbacks for exploration permits and mining grants, and payola/preferential treatment due to environmental impact studies, political considerations, etc. The resultant corruption would make the abuse of the Oil for Food Program look like quiet hour in kindergarten in comparison.
Anyway, I doubt the mining companies will provide investors the end-to-end production cost per ounce discussed in the Mineweb article, but the fact it is being discussed is positive news.
By the way, thinking about pe ratios from the nether regions reminded me of this, from Mark Twain’s The Mysterious Stranger:
He [Philip Traum; i.e., Satan] …said his papa was in shattered health, and had no property to speak of—in fact, none of any earthly value—but he had an uncle in business down in the tropics, and he was very well off and had a monopoly, and it was from this uncle that he drew his support. The very mention of a kind uncle was enough to remind Marget of her own, and her eyes filled again [with tears]. She said she hoped their two uncles would meet, some day. It made me shudder. Philip said he hoped so, too; and that made me shudder again.
“Maybe they will,” said Marget.“Does your uncle travel much?”
“Oh yes, he goes all about; he has business everywhere.”
Come to think of it, Al Gore does travel a lot.