Though gold is up for the year, it still seems to be bumping up against resistance at the $1350 to $1380 level. This time on Financial Sense, we spoke with well-known mining geologist Dr. Keith Barron on gold, the gold mining industry, and his search for the "Lost Cities of Gold" in Ecuador.
Many of us are familiar with the concept of peak oil. Now, we’re facing something similar with gold reserves, known as peak gold. The two situations are basically the same: In both cases, most major, easily discoverable and exploitable deposits of the material have already been found.
We’re likely looking at declining production for the foreseeable future, Barron stated, unless somebody comes up with some sort of magic solution to find more gold in the ground.
This isn’t Barron’s opinion only, he noted. Ian Telfer, chairman of Goldcorp, has stated that we reached peak gold last year. Randall Oliphant, the head of the World Gold Council, has also said that we have reached peak gold.
This has some pretty stark implications for the majors. Over the last 10 years, they have amassed reserves in the ground to leverage themselves to the price of gold and also to attract investment.
In their rush to acquire reserves, they blew some capital on plays that were unsound. As a result, the industry got beaten up pretty badly, and many companies downsized. Though they reemerged, they aren’t finding the big deposits to justify the investment.
“Some of the majors are just treading water,” Barron said. “They're replacing deposits that are being mined quickly and diminishing. They're not really growing the total amount of resources and reserves that they have within the company under their control. Other majors have reserve curves that are just going down, and that's the kiss of death. You wonder how long they’re going to be able to keep that up before eventually, they're attractive for a takeout.”
Technology and New Deposits to the Rescue?
Though the peak oil thesis was hit hard by the advent of fracking, nothing similar has emerged in the gold mining industry. There has been some success analyzing data from expired mines to find new deposits, but that's about it.
“They’re just going after largely the dregs that are left behind for many years of mining,” Barron said. “It's not as effective to go out there and find brand new deposits in greenfield areas.”
In terms of prolific gold belts, there are some new frontier areas. Barron is currently working in Ecuador looking for the famed "Lost Cities of Gold," near the same area where he found a very large gold deposit back in 2006 with Aurelian Resources.
But a lot of companies are reluctant to do that kind of exploration anymore, Barron noted. They want what is called brownfield projects, within reach of infrastructure.
“Not only does it get harder from a technological aspect,” Barron said. “People say, ‘I don't want to go to places like Ecuador because there's political risk.’ Well, the fact of the matter is if you found anything in the US, you'd have the Sierra Club … and everybody else on your back and they would be bringing court actions and injunctions to stop you from doing what you're doing.”
This political risk exists almost everywhere, Barron noted. In places like Venezuela, where the Chavez government nationalized resources, the mining industry has all but collapsed.
“I think that's pretty obvious where we are right now,” Barron said. “When there's a change of political regime, it really behooves the industry leaders in these various countries to engage with the government all the time. … Otherwise, if you just kind of put your head in the sand, you're going to get whacked.”
Juniors to the Rescue?
With the majors essentially on the sidelines, the juniors are the ones actually looking for new reserves. This plays into their business model, Barron stated, as they really aren’t set up or positioned to eventually become producers. Very few juniors morph into producers, he added, which may actually be how they pitched their company to investors.
Without that financial backing and experience, they’re unlikely to ever bring mines into production. Instead, their goal is to be acquired by the majors.
Sometimes the takeout is friendly, Barron added, and sometimes it’s hostile. But this is how the majors are growing, not organically, but through mergers and acquisitions. Because many have decimated their exploration teams, he stated, they're just not finding new deposits themselves.
“This is going to be the wave of the future,” Barron said. “It's already out there and has been there for about 10 to 12 years. … If your expertise is finding deposits and developing them and then successfully transferring them onto a bigger operator, a major, and making a lot of money for the shareholders, then you'll attract the funds.”