How Close Are We to Peak Gold?

Well-known mining geologist Keith Barron, Chairman and CEO of Aurania Resources, tells that with the average goldmine worldwide extracting gold below 1 gram per ton, peak gold is probably here and that, unlike oil, there isn't any new technology that makes finding it or extracting it any easier.

No New Tech Coming, Peak Gold Is Probably Here

Similar to what we’ve seen in the oil markets with fracking, past innovations helped make extracting marginal gold deposits economical. Now, however, the low-hanging fruit is gone, Barron stated. An average gold mine worldwide is extracting gold at below 1 gram per ton and there isn’t a lot of economic wiggle room if deposits are yielding less than that.

As a result, large operations have emerged that rely on open-pit mining and economies of scale to reduce costs. If the gold price dipped down, however, operations such as these would be in trouble, Barron noted, because the margins are very thin.

It’s doubtful that we’ll see any technology emerge that would make lower grade ore bodies pay more efficiently, Barron noted. The only thing he sees down the road is more recovery operations.

There has been talk of Peak Gold for several years, Barron stated, and the numbers indicate we will reach it this year or next. After this point, production profiles start to fall worldwide.

Upsurge in Activity

When the gold price declined after 2012, there wasn’t much going on in exploration, but conditions are improving now.

We’ve seen an upsurge in activity over the last 8 months, Barron noted, especially by the juniors, less so in the mid-tiers and the seniors. Nevertheless, there are a lot of new drill results coming out from projects all over the world.

“It’s coming back,” Barron said. “It’s not exactly where it was in the boom times of 2005 and 2006, but I think it’s heading in that direction.”

To some extent, the run-up has been fueled by the rise in gold prices after bottoming in late-2015, but it’s also due to the realization that the majors are going to have to replace their reserves.

Source: Stockcharts.com

The majors aren’t good at replacing their reserves organically, Barron stated. Mergers and acquisitions have already started in the new cycle, and Barron expects we’ll see this continue.

It’s important to understand that in the down times, the majors sacrifice all of their exploration staff. When the junior minors find new reserves, they get picked off. Interestingly, companies are able to raise money for the first time in a long time.

“It’s always a bit of a battle for the juniors,” he said. “They have to create as much wealth as they can for their shareholders before they get picked off, either in a friendly or sometimes in a hostile fashion. I think we’re at the head of a boom cycle again. We’ve seen some interesting things happen.”

Best Plays in Mining and Metals

The majors haven’t done very well at paying returns to investors, Barron argued. They’re also in dire need of replacing reserves.

“Remember that the majors have not been replacing their reserve ounces,” he said. “This is very, very critical. The only way that they can grow because they don’t have any exploration staff anymore, is to go and acquire.”

He recommended holding a little bit of bullion, but his strategy has been to look very hard at the royalty companies, who’ve been doing particularly well.

The reason is, many of these contracts were negotiated 3 and 4 years ago when the industry was on its knees, and there was no way for mining companies to raise capital through the equity markets.

“The royalty companies got royalties on very favorable terms,” Barron said. “In a lot of cases, those royalties are paying off now, because the projects are now in production.”

He suggested having a sprinkling of some juniors, chosen judiciously from companies where management has some skin in the game and they’re not paying huge salaries. Look at balance sheets to see if they have cash and act accordingly.

He would also hold some mid-tier companies as well, some of which are doing particularly well. These are probably set to potentially be acquired, he added, especially those in safer jurisdictions.

“It’s important to watch the exploration space right now and see who’s coming up with the new discoveries,” he said. “You have to be nimble in this market. ... If you’re making some considerable profit in the gold space, then don’t ride it through forever.”