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More money, less gold

Why larger exploration budgets won't mean higher gold mining output...

AS THE TREND for spot gold prices to move higher rolls on, the big gold mining companies keep racing to re-stock their shrinking reserves.

   Three of the larger gold miners just said they're going to spend record sums trying to find new gold-in-the-ground. Trying to pick the winners – and selecting junior miners on the brink of receiving a hot takeover bid – might just pay off handsomely.

   But don't neglect the bigger picture as you chase these short-term M&A profits. "Route One" to growing proven and probable reserves in the ground is more than likely to eat up total exploration budgets in 2008 and beyond.

   In short, the latest news about record exploration budgets will only cut real exploration on the ground. And that's only going to support the price of physical gold in the future.

   AngloGold Ashanti (AU) – the world’s third-largest gold producer – just said that it plans to hike exploration spending by 60% in 2007. The South African miner wants to diversify away from its home base, where total gold output has now sunk by one-half inside 10 years.

   Randgold Resources (GOLD), currently mining in Mali, says that it has put a team together to scour central Africa for new reserves. It added one million ounces in 2006. Now the CEO, Mark Bristow, has appointed Rod Quick – who recently led the discovery of 200,000 ounces at the Tongon project in Ivory Coast – to lead his 'African Hunting Team'.

   Between now and October, this team will visit at least eight countries including Sierra Leone, Liberia, and the Democratic Republic of Congo – three countries just emerging from bloody civil conflicts.

   "Some of these countries are showing potential to change," said Bristow to MiningMX.com as he announced the news – and the return of fair government alongside law and order should help make gold mining feasible once again.

   But higher-risk doesn't always mean lower costs for the world's gold-mining companies. Following a $10 million feasibility study, Randgold's project at Tongon in Ivory Coast – where the rebel leader, Guillaume Soro, has just been named as prime minister – is due a final "go ahead" decision at the end of next year. The capital cost of developing the mine, according to figures published by MiningMX, would then work out at around $625 per ounce.

   "The pioneer junior companies are already in these countries," noted Bristow. "We are talking to them and meeting the governments and filling in our geological information box.

   "We would like to believe there’s merit in us motivating to be the partner of choice because if [the juniors already there] do a business combination with us, their shareholders will get a better exposure to leverage rather than the bigger guys where they’d just be absorbed."

   Then there's Newmont (NEM), the world's second-biggest gold producer. Itself subject to daily rumors of a takeover bid from Barrick Mining (ABX) – the world's No.1 – Newmont added 10 million ounces to its reserves in 2006. The company said this week it wants to keep growing reserves at that rate in 2007 and beyond.

   "We would like to do more deals than we have done in recent years," says Patrick Highsmith, global manager for exploration business development.

   "It can be private placements, joint-exploration alliances and, if assets are for sale, that too."

   Assets for sale, of course, is a synonym for mergers and acquisition. It's "Route One" to growing gold mining reserves, outstripping genuine exploration spending many times over.

   Non-ferrous exploration in total hit a record $7.13 billion last year, according to the Metals Economics Group. But merger & acquisition spending in the gold sector alone was nearly three times as much according to analysis by Merrill Lynch.

   "It has to be a multi-pronged approach if you're trying to get 10 million ounces of gold a year," says Highsmith at Newmont. "We're a bigger company now and we need to find new reserves faster.

   "We are talking to a lot of juniors."

   Taking over a junior – the most likely aim of talking to them – usually means a sharp drop in the combined exploration budget. Junior miners stumped up for more than half the world's total non-ferrous exploration budgets in 2006, says MEG. But over the last ten years, post-merger budgets the following year have sunk by 20% on average.

   If you're looking for the bull market in gold to run beyond the end of 2007 – and Blackstone Merrill Lynch this week forecast that we're only mid-way through a rising commodities market seen once every 50 years – you may be well advised to include physical gold bullion in your portfolio, alongside your gold mining selections.

   Because the rush to find new gold reserves is in fact likely to cut future gold production.

Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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