<history of folks finding more reserves in natural resources>
There is certainly more gold, silver, base metals and oil, etc. to be found. I don't subscribe to the depletion theory. But, the critical variable is price. Oil will now be found at $30 that wouldn't have been worth the hunt at $15. The same with gold, and my point is that meaningful (in the context of total reserves and production) new "economic" gold will not be found at $265.
To summarize:
1. 700 million producer's reserves is overstated at 265. How much so is conjecture, but worth a hard look. I'm deeply suspicious.
2. There will continue to be production challenges in mining. It could be technical, political, weather, labor, environmental. But 265 doesn't allow the profit cushion to overcome those difficulties (slumlord syndrome: broken pipe, close 'er down). Nor does it allow sufficient cushion to bring even low cost newer deposits on line (such as Pascua, Getchell, or Las Cristinas).
3. Exploration has dried up. There isn't any reward to investors even if discoveries are made (witness FGX's Marlin). If there is no reward, then no capital will be allocated. It is now terminal, and the blame must be placed on the majors for abusing their "farm system". Majors will not replace production in most cases, and will need to start from scratch themselves with grassroots exploration. But, where has the mining and exploration talent gone. Answer: heaven(similar to the energy sector today). I expect exploration costs and fumbles to skyrocket as a result.
4. For the lucky (I don't subscribe to the "talent" myth), older, high price hedges are being delivered. Those gravy days are ending and such outfits are now living on borrowed time, and so is worldwide production. Because prices are dropping on forward contracts and contangos (from low interest rates and prices), revenue per oz is dropping sharply. As that occurs the incentive to produce all but the lowest cost gold is removed. Production elsewhere will quickly erode. I expect that the process is underway and will quickly accelerate. There will be a number of shut down failures in 2001. I feel there is a good possibility one may have a substantial stash of undeliverable hedge contracts (the great turd) for some bank to deal with.
The dye has been cast, I predict prices will need to go over 350 and a number of years will be required to restore production to current levels.
I am bullish only on the few dozen or so explorers with low cost deposits (the top quartile)under their belts. They have the goods and the markups will be substantial. I am modestly bullish on producers that are unhedged and strong enough financially to survive a while longer. I am bearish on hedgers, and clueless companies like PDG, ABX, Aussies, et al. For failing insurance companies they look pricey. And I am very bullish on POG. |
