More money is chasing less gold...
I WAS in Canada last week, says Byron King at Bill Bonner's Daily Reckoning.
Manitoba to be exact. I was deep in post-glacial, sub-Arctic boreal forest. Truly, it was far, far away. Indeed, it's raw wilderness. You can't drive there. I do NOT recommend walking, either, unless you care to explore your inner hunter-gatherer.
How far? You could start from Winnipeg, which is kind of far away – unless you live there. Then go a couple hundred miles northeast, towards Hudson Bay, which is even further. Like I said, it's far, far away.
Finding the exact Lat-Long involved a couple of hours grinding holes in the sky, in a prop-job. Then we landed – on floats – on a lake that freezes totally solid in wintertime. Water temp? You need fur-lined swim trunks, even on the best of days. It was truly Robert Service country, if you get my drift. If you don't get my drift, look up Robert Service.
What was I doing? Looking for gold, because there's not much else to do up there aside from count trees and avoid bears. Or to paraphrase Robert Service, I was "moiling for gold." Well, after a fashion. Actually, I was looking at cores and rock samples that other people moiled before me. And do you know what? I found gold, too. Lots of it…
Here's a quick rundown. In my newsletter, Energy & Scarcity Investor, I've been following this relatively small exploration company. It holds mining claims in Manitoba. Many years ago, a few big mining guys – household names, if you follow the gold space – explored the area.
But back then – and not that long ago, in the scheme of things — Gold Prices were much lower. So the big guys drilled, looking for high-grade ore bodies. Their "exploration paradigm" was that they needed lots of grams per tonne to make the economics work.
In the process of looking around, the big guys scored some hits and clues, but (alas!) they never found anything real big. That is, they found nothing big and high-grade enough to pay for all the big-company overhead.
Nor, in days gone by, did the big guys break the code on the geology, the structure or the geochemistry of the region. Nobody did enough science to figure out the "how & why" of the regional gold play. They were drilling holes on a grid, more than exploring.
The big guys spent good money, to be sure. But they went at it with certain preconceived ideas. Not to be (too) uncharitable, but they drilled round holes with square thinking. Then again, perhaps they were looking for something that's not there. It happens. And after all, with gold as with many other resources, the big, "easy" stuff has been found.
Now we're in an era when Gold Prices are much higher than in days of old. Sure, mining suffers from the same inflationary forces as most everything else – energy, steel, concrete, labor, equipment, machinery, taxes, you name it. But at $1,750 per ounce of gold, it can pay to move a lot of rock, these days. Toss paper Dollars at a rock crusher, and grind-out those grams of gold — even out in the middle of nowhere.
At any rate, there's this nimble little outfit, working in Manitoba. The exploration team has sniffed around, and figured out how the Precambrian "greenstone" on the company claims came to be faulted and fractured, and charged-up with gold (and a bit of silver). They figured out the how & why. Small company, but downright elegant work.
Of course, one lesson here is that with modern technology – and low overhead – a well-run small company can do things that used to be reserved for the realm of the big guys. Indeed, we live in a world where a subset of small exploration guys are the new gold finders — the "prospect generators." Then the big guys come along to develop mines.
Large companies like Barrick, Kinross, and Agnico Eagle aren't out there "exploring" on their own account. Well, OK. To be fair, the big guys collectively have claims that they work on their own account – just not too many of them.
For the most part, "exploration" teams of big company geologists and engineers spend their time flying to other peoples' mining camps. They go into the boondocks, and evaluate plays and prospects that other people put together — those prospect generators.
Sometimes, the biggies spend funds to "help" a small company explore, like with Freeport McMoRan Copper & Gold, and its new discovery in Serbia. Freeport helped the little guy drill some very important holes, and find a world-class copper-gold play.
Look at it from a big company perspective. There's more exploration leverage by allowing "somebody else" to do the early stage efforts.
- That is, somebody else raises seed capital.
- Somebody else stakes original claims.
- Somebody else does early stage geophysics, geochemistry and geologic mapping.
- Somebody else does the early stage drilling and assaying.
- Somebody else puts together the outlines of how & why of the claim.
- Somebody else establishes a bankable resource number.
Then along come the big guys, to fund further exploration — as with Freeport in Serbia — or to "mine the gold" on Wall Street, so to speak. The big guys support, or buy out the small guys. Then the biggies inventory the resource until it's time to get all engineered-up, and build a new mine to deliver output.
Looking ahead, I foresee great times for small prospect generators, as well as the smart big guys — with capital discipline — who know how to build prospect generator teams to develop gold plays. It'll be a rising Gold Price environment, too. Perhaps a "melt-up" in Gold Prices. Why?
It's more than the almost shop-worn issue of how governments everywhere — starting with ours, in the US — are continuously devaluing national currencies. Inflation is looming, of course.
But among other reasons for a Gold Price melt-up, I foresee troubles at the macro-end of the gold supply. In particular, we're going to have big problems with the gold supply out of the world's third-largest producer, South Africa.
There's growing labor unrest in South Africa. Just last week, most of the mines of Anglo Gold Ashanti (which we sold last year from OI) were shut in by strikes. This is a problem across the mining sector. And the problem will NOT end quickly. This unrest isn't the kind of thing you can dismiss by saying, "The natives are restless, so throw 'em a bone."
At the face of the mine, workers want more money. But actually, over the past decade, they've been earning "more money," while spending it faster than it comes in. Miners in South Africa are subject to the same inflation in food, energy, housing costs, etc. as everyone else across the world. That, and we're dealing with ongoing social issues that keep poor people poor. So even "more money" won't necessarily solve the problem. It's a long story, but More isn't enough.
Meanwhile, gold mine managers see rising costs and more challenging extraction. Ore grades are declining, while many mines are digging deeper and deeper. With energy costs rising (namely, oil & electricity), and overall worldwide cost inflation for concrete, steel, machinery, equipment, spares & repairs, supplies, it's harder to make the economics of South African deep mining work.
Then there's political unrest, illustrated by South Africa's political firebrand, Julius Malema, with his continuing discussion of "nationalizing" mines. There's a lot going on in all this, but the short version is that it frightens off foreign investment.
Restive labor. Tight capital. Problematic geology. Something has to give. I suspect that it'll be a tighter gold supply, meeting rising global inflation. So elsewhere in the world, the prospect generators will find more plays out in the bush, and team up with the big guys.
Ride to the sound of the guns. We live in a world where more and more money is chasing less and less gold.
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