While it’s true that gold production has increased by nearly 2 percent a year for the last 100 years, output from the world’s gold mines has recently plateaued. According to a Thomson Reuters report, 2016 was the first year since 2008 that gold mine output fell – by 707,315 ounces, or 3 percent.
McKinsey & Company, a global consulting firm, found that in the 1970s, 80s and 90s, the gold industry found at least one greater than 50-million-ounce gold deposit and at least ten +30Moz deposits. However, since 2000, no deposits of this size have been found, and very few 15Moz deposits.
Moreover, gold grades have been declining since 2012, meaning more ore has to be blasted, crushed, moved, and processed, to get the same amount of gold as when the grades were higher, significantly adding to costs-per-tonne.
Add to this the practice of high-grading where, instead of mining a deposit as companies should – by extracting and blending both low-grade and high-grade ore at a given strip ratio of waste rock to ore – many are ‘high grading’ the orebody by taking only the best ore, leaving the rest in the ground.
We can actually see evidence of gold production peaking in 2019. During the first quarter, global gold production slumped 11 percent, or 15 million ounces, according to Mining Intelligence, a Vancouver-based data provider. All of the top 10 biggest gold mines reported production declines in Q1, as indicated by the table below. Barrick only produced a million ounces in the first quarter, the lowest quantity in 16 years.
Even with gold dancing above USD 1,500/oz during the third quarter, global mine production was 1 percent lower in Q3 and flat year to date, at 28.2 million and 83.04Moz, respectively.
Yet many continue to believe that gold production keeps increasing and meeting the required demand. In 2018, gold demand reached 4,345.1 tonnes. The World Gold Council reports that 2018 was a record year for mined gold production – 3,347t. Gold jewelry recycling accounted for 1,173t, bringing total gold supply to 4,520t. If we stop there, we show a slight gold supply surplus of 175 tonnes.
However, if we strip jewelry recycling from the equation, we get an entirely different result; 4,345 tonnes of demand minus 3,347 tonnes of production leaves a deficit of 998 tonnes.
This is significant because it’s saying that even though major gold miners highgraded their reserves, mining all the best gold and leaving the rest, and even hit record gold production in 2018, they still didn’t manage to satisfy global demand for the precious metal; not even close. Only by recycling 1,173 tonnes of gold jewelry could gold demand be satisfied.
In sum, the combination of high grading, which lowers both reserves and grades, a drastic reduction in new discoveries due to a lack of exploration spending, and decreased mine lives means that it will be extremely challenging for the industry to maintain current production levels. According to the background report, by 2020 global mine production is expected to drop 3 percent to 95 million ounces and keep falling after that; in other words, peak gold. The report estimates that by 2025, production will be one-third lower than 2020’s output.
The 2019 creation of Nevada Gold Mines (the Barrick-Newmont JV) and their recent major discovery have piqued the interest of other companies looking to discover and develop new ounces in the golden state. Major miners with new projects include AngloGold Ashanti, Coeur Mining, and Kinross Gold. Junior activity is also high. Here are two juniors working in ‘The Golden State”:
Getchell Gold (CSE:GTCH) is focused on its recently acquired Fondaway Canyon and Dixie Comstock properties in Nevada. Both have historical resource estimates. The greater of the two is Fondaway Canyon. A 2017 technical report denotes 409,000 oz of indicated resources grading 6.18 grams per tonne, and 660,000 oz inferred grading 6.4 g/t, for a combined 1.1 million ounces. The high-grade resource begins near surface and is open at depth and along strike.
NV Gold (TSX-V:NVX) plans to capitalize on under-explored gold properties in Nevada. The Vancouverbased company has control of a sprawling portfolio of 15 gold projects that are all within Nevada’s three major gold trends. Two extensive geological databases serve as an information bank for identifying prospective, drill-worthy projects. The goal is to systematically evaluate and execute focused exploration programs with two to three drill programs per year.
Looking at recent board additions, company Guyana Goldstrike has an interesting project in the pipeline.
Guyana Goldstrike (TSX-V:GYA) is focusing on the relatively unexplored southwestern part of Guyana, which is developing Guyana’s first goldhosted banded iron formation. GYA has commissioned a new resource estimate to verify previous work done at the Mazoa Hill zone, part of its flagship Marudi gold project in Guyana. The NI 43 101-compliant report delineated 259,100 ounces of gold at 1.8 grams per tonne (g/t) in the indicated category and 86,200 ounces inferred grading 1.6 g/t. The 50km2 property is 85 percent unexplored – leaving plenty of upside for the company and investors. Furthermore, it comes with an 18-year mineral license.
Silver demand > Supply
The rarity of both gold and silver becomes apparent when we consider how little of each has been mined throughout history – just 6.1 billion ounces of gold and 51.3 billion oz of silver. All of the gold ever mined around the world could fit into a cube measuring 21.6 meters on each side, and all the above-ground silver could fit into a 52m cube.
According to the Silver Institute’s 2018 Silver Survey, there were 2.457 billion ounces of silver being held in vaults, silver ETFs or ETPs, government silver holdings, and industrial silver stockpiles.
The all-time estimated mined goldsilver ratio is 8.8:1. That means that for every 8.8 ounces of silver mined, we have mined 1 ounce of gold. We would expect there to be roughly eight times more silver than gold, but there isn’t. Instead, above-ground stocks of investment-grade gold and silver bullion are virtually even. The reason is industrial demand for silver. The white metal is used in a mind-boggling 10,000 industrial applications.
While most of the mined gold is still around, either cast as jewelry or smelted into bullion and stored for investment purposes, the same cannot be said for silver. It’s estimated around 60 percent of silver is utilized in industrial applications, leaving only 40 percent for investing. Of the 60 percent demanded by industry, 8 of 10 ounces is either used up in manufactured products or discarded in landfills. Some silver researchers say closer to 90 percent has been lost to landfills. Perhaps we should be mining them?
Both silver and gold have roughly the same amount above-ground supply available for investment purposes. However, since very little gold is used by industry, it trades as an investment commodity – moving up and down in relation to factors like the US dollar, inflation, interest rates, and sovereign bond yields.
In comparison, silver has a relatively small amount for investment, just 40 percent of total supply. As over half of global supply is needed for industrial applications, silver trades much more like an industrial metal than an investment commodity. When gold is over-valued compared to silver, investors take advantage of the arbitrage opportunity by selling some of their gold holdings in order to buy silver. This also explains silver’s volatility. Since the investment market for silver is so small (60 percent is locked up in industrial uses), it swings up and down wildly with relatively low volumes.
A record amount of silver was sought in 2018. According to the Silver Institute’s annual survey, total physical demand last year rose 4 percent to 1,033.5 million ounces – a three-year high. The need for silver was driven mostly by purchases of bars and coins, jewelry, and silverware.
The amount of silver produced from mines fell by 21.2 million ounces last year, the third consecutive drop after 13 years of uninterrupted supply growth. The 2019 World Silver Survey attributes the 855.7Moz loss to falling production at lead and zinc mines; 75 percent of silver is mined as a by-product, mostly of gold, copper, lead, and zinc. According to the USGS, although silver was the main product at several mines, it was primarily obtained as a by-product from lead-zinc mines, copper mines and gold mines, in that order. Polymetallic ore deposits account for over two-thirds of US and world silver resources.
As for 2019, mine supply from the top three silver-producing countries, Peru, Chile and Mexico, all dropped in the first half of this year. Data collected from each country showed Peru’s H1 silver production was down 10 percent, Chile fell 7 percent, and Mexico saw a 4 percent decrease from January to May.
Silver output in 2019 is expected to decline to 913.5Moz.
Most of the world’s silver is mined in Mexico; 5,600 tons in 2017, followed by Peru at 4,500t. The latter also has the most reserves at 93,000t, followed by Poland and Australia, each at 89,000t.
Silver is poised to do well, considering it is currently far undervalued compared to gold, at 86 ounces of silver to one ounce of gold (86:1). A ratio above 60 typically represents undervalued silver, while a ratio below 20 demonstrates undervalued gold.
Thinking Outside the Box
Where else could a major, perhaps working with a junior, go to find that elusive monster gold or silver deposit? Investors, explorers, and miners need to start thinking outside the box when looking for gold and silver. At Ahead of the Herd, we think a very good strategy would be to look for VMS deposits, sedimentary copper/silver, and porphyry copper/gold deposits.
VMS deposits make beautiful mines. You have rich base-metal content and often a precious metals kicker to boot. Usually when gold and silver prices are up, the economy isn’t doing so well and base metals prices are down. The reverse happens during economic booms. This makes a VMS mine a winner during all economic cycles. They also have scale. A junior that comes upon a VMS deposit will be the belle of the ball as far as attracting mining company suitors looking for a partner, a property, or an acquisition, since a VMS mine can produce high metal volumes for many years.
Boreal Metals (TSX-V:BMX) is concentrating on its Gumsberg VMS project in Sweden. The 18,300-hectare land package, with five exploration licenses, was mined from the 13th century through to the 1900s, with an astounding 30 historic mines on the property including Östra Silvberg – the largest silver mine in Sweden from 1250 to 1590. New geophysical surveys plus reconnaissance drilling and analysis of historical drill data identified fresh targets near the historical workings. In 2019, a 1,458-meter drill program yielded high grade silver-zinclead mineralization at depth.
As large pure gold deposits are so hard to find, gold miners are also turning to deposits that contain other metals, like copper, gold and silver.
Representing nearly half of the world’s copper production, the Andean Copper Belt runs from Chile in the south, through Ecuador, up to Colombia and then northwest into Panama. Much of the Colombian part of this immense copper belt is hugely under-explored.
Max Resource (TSX-V:MXR) has two sedimentary copper/silver targets in Colombia: Cesar and La Guajira. In a recent interview, the company’s head geologist, Piotr Lutynski, told AOTH that Colombia’s stratigraphy is similar to his homeland, Poland, and its Kupferschiefer sedimentary copper deposits. “The copper and silver are very classical elements likely to be in sedimentary deposits like Colombia,” Lutynski explained, noting that he has worked in similar mineralization in Peru. “It’s the same stratigraphy with the sandstone below the limestone on top and the Kupferschiefer equivalent in the middle.”
KGHM Polska Miedź (KGHM), the sole producer of copper in Poland mined 30.252 Mt of ore at 1.49 percent Cu and 48.6 g/t Ag, comprising 452 kt of Cu and 1471 tons of Ag in 2018.
A crew at Cesar has been looking for surface outcrops that the company thinks could be the tip of the iceberg of a giant sediment-hosted copper system below surface. If there’s an orebody underneath those outcrops, Max Resource would be looking at a major discovery. The company has identified a 70×20-km copper-silver target area. The initial exploration program identified 19 distinct mineralized copper occurrences over an area of 9 sq. km, which is open in all directions. Initial grab sample assays ranged from 0.3 percent to 4.2 percent copper with 34 of the 43 assaying in excess of 1 percent copper; 15 of the 43 assaying in excess of 2 percent copper; and 4 of the 43 samples assaying in excess of 3 percent copper. Silver values ranged from 1 to 116g/t.
The world’s major gold miners are starting to get desperate in their search for gold. If you are the CEO of a junior resource company with a sedimentary copper-silver or porphyry copper-gold deposit in the Andean Copper Belt in Colombia, a polymetallic deposit in Sweden, a Banded Iron Formation in Guyana, or quality gold projects in Nevada, don’t be surprised when people come calling.
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Richard Mills owns shares of Boreal Metals, Guyana Goldstrike, Max Resources, Getchell Gold and NV Gold.