This year’s opening keynote at the Denver Gold Group’s European Gold Forum in Zurich was presented by Michael Chender of SNL Metals & Mining who came up with some very interesting statistics on gold exploration and their likely impact on gold output going forward. Chender’s Metals Economics Group (MEG), which was taken over by SNL about two years ago, has been one of the foremost researchers into mineral exploration trends for many years and the group’s analyses carry considerable weight in the analysis sector.
Chender pointed to current exploration trends as suggesting a significant squeeze on potential future gold supply. While there had already been a notable decline in the discovery of major new gold discoveries anyway over the past several years, one of the unintended consequences of the latest spate of cost cutting and reserve and resource re-evaluation by the gold mining companies has been a sharp decline in exploration expenditures. The extent to which industry has cut back will thus have a huge impact on resource and reserve replacement going forward.
Last year, Chender reckons, exploration expenditures fell from around $10 billion to $6.7 billion and the trend remains downwards. What is particularly worrying, he noted, is that exploration activity by juniors – which historically have been the most significant finders of major new gold deposits, was down 40% last year as funding dried up. Indeed, many are struggling to stay alive, let alone spend more money on exploration. Ideally, this should be a time when exploration expenditures increased, but human nature suggests that even those with traditionally large budgets will be cutting back expenditure items like exploration. And for the majors and mid tier producers the fall off in such expenditures last year was from 3.5% of turnover down to 2.7% – and again this trend is likely to get worse before it gets better. Overall he expects exploration expenditures will decline by another 20% in the current year.
What is also disturbing is that the proportion of spending on grassroots exploration as a proportion of the total spend has dropped from 40% to 30% as companies become more and more risk averse. It is also notable that exploration activity is becoming more concentrated in countries considered to have safer jurisdictions with the biggest proportion in areas like North America, whereas activity in some parts of the world – which might actually be geologically more likely to host major discoveries like Africa and Indonesia has been diminishing over perceived political risk.
With discovery rates falling precipitously we could see ahead only around one-third of the number of new ounces found in the boom years of the 1990s by 2025.
Adding to this the gold miners have been lowering the price at which reserves and resources are calculated. This is, in effect, reduces mine lives and this, in conjunction with lower exploration diminishing exploration returns, will only add to the longer term pressure on gold output. It is also taking far longer to bring a new mine on stream from discovery to production. Indeed, Chender said that in some cases this can be as long as 25 years given the huge economic and environmental hoops mining companies have to go through to get a new project off the ground.
How can these trends be corrected? Barring Peace on Earth and other serendipitous scenarios (unlikely!), there are some frontier areas which could have an impact, like undersea mining and new technology which could make both explorations and extraction more efficient. But the effects of these are likely to be fairly limited in the near future. A big boost in metal prices could also help substantially.
Overall, current exploration trends are seen as likely to lead to less metal availability long term, and the question is whether this will lead to much higher metal prices ahead. Ultimately this seems likely, as perception of the problems facing producers in maintaining, or increasing, output, builds amongst potential investors. The big question of course is the likely timescale for this to occur.