This bull market in Gold has seen just one "elephant" sized gold mining discovery so far...
ONE OF THE MOST intriguing aspects of the current bull market in Gold is the dearth of major discoveries, so-called "elephant" finds, says David Galland of Casey Research.
This comes despite record amounts of money spent on exploration since the gold bull market began in 2001. Older and smarter minds than mine – minds resting in the cranium of Explorers’ League members here at Casey Research, for instance – have been convinced that a number of major discoveries would be announced.
But so far, other than a small handful that appear to hold the stuff, there has only been one legitimate "elephant" bagged. And unfortunately, the carcass of that particular elephant – found by the team of Aurelian – rests entirely within the sketchy outlines of the nation of Ecuador, where the local politicos are currently circling like a pack of hungry hyenas.
Gold: Elephant Discoveries Still Lacking
It has always been our contention that what was needed to light the fuse on the junior gold-mining exploration stocks would be, in no specific order:
- Sustained higher gold prices;
- Improving financials and free cash flow of the major producers;
- A big gold elephant discovery to heat the blood of the investing community.
So far, we have had No.1 and we are beginning to see No.2.
But to date, No. 3 remains remarkably elusive.
Now, don’t misunderstand me. You can have a whopper of a bull market in these stocks without any big elephant gold deposit discoveries. That was the case in the 1970s bull market.
You can also witness a huge bull market in Gold Bullion itself, driven by risk-averse cash savers and safety-seeking investors, without gold miners enjoying any significant "leverage" in their stock prices. That's what has happened for much of this decade's surge in gold so far.
But a big gold discovery – a real elephant find – fires the imagination and can jump-start things in a big way, no question about it. Evidence is provided by the gold miners bull market of the mid-1990s, the most powerful to date, which actually occurred against a back drop of flat to falling Gold Prices.
In case some of the big winners from that market have slipped from your memory, they include returns such as Cartaway – up 26,040% – Pacific Amber (up 4,376%) and Arequipa (up 5,692%)
Elephant Gold Deposits: What's Going On?
According to MineWeb, Peter Munk – the somewhat unpopular chairman and acting CEO of Barrick Gold, the world’s largest gold producer – stated at the company’s recent AGM that there have been "virtually no new discoveries."
While we might disagree around the edges of that statement, Chairman Munk is technically correct in that the level of discoveries being made is a small fraction of that needed to replace the depleting reserves of the big gold-mining producers.
In short, we appear to have reached the era of "Peak Gold", where on-going production from existing mines outstrips new discoveries under-ground, shrinking the reserves of the gold mining industry and pushing production lower year over year.
Whereas a major discovery used to be 10 million ounces or more, the threshold for attention-getting discoveries these days has fallen to more along the lines of 1 to 3 million ounces...and even those are hardly falling off the trees.
Viewed from the perspective of an investor in the junior gold mining stock sector, this lack of elephant discoveries means the fuse is lit – starting with straight-up supply and demand fundamentals – for a rocket shot tomorrow.
Adding boosters to the rocket, we have a commodities bull market that shows no sign of ending anytime soon. And while the US Dollar will periodically rebound, it is not going to somehow reinvent itself as sound money any time soon – perhaps not in our lifetime. That continues to fuel the bull market in physical Gold Investment.
Importantly, as you can see by reading between the lines in Chairman Munk’s words above, once the gold mining majors get cashed up – and they become serious about replacing their reserves – they are going to have to look downstream to the juniors with existing discoveries. Even those discoveries below the 5-million-ounce threshold they previously required to even consider taking an ore body into production will look attractive, let alone the "elephant" discoveries so clearly lacking over the last decade and more.
Gold Miners: Missing Elephant Finds Present Risk & Opportunity
Of course, lowering the threshold on deposit size will require a trade-off. In order to be considered for an acquisition, a smaller deposit will almost certainly have to be near surface and open-pittable. It will also have to be near good infrastructure and located in a jurisdiction with good laws and reasonable taxation.
There is, in this situation, both an opportunity and a risk – not to mention a cap on new mining supply to the Gold Market. Starting with the risk, if your portfolio now includes gold miners going after deposits in the one- to five-million-ounce range, you need to make sure they are not in a remote location, or will require going underground or building a mill to process sulfides.
And anything under one million ounces? Forget about it!
As for the opportunity, while the odds and the amount of exploration spending still favor that we’ll see the discovery of at least one and maybe two monster elephant deposits in this cycle (there are a couple of companies advancing projects with that potential), there has rarely been a better time to Buy Gold on the supply/demand fundamentals, while investing risk capital into junior exploration companies with modestly sized projects in good locations.
That said, you should still be focusing only on projects with at least two million ounces, or the strong potential of same. In other words, take the opportunity in these down markets to focus on getting positioned ahead of the gold mining majors before they start buying these smaller stocks outright.