eh, let me do some contrarian thinking out loud about that article....
Yeah, OK, so exploration has collapsed - anyone holding junior miners over the last 18-months learned that BIG time. And yes, there is little capital fro new exploration - especially what this industry calls "greenfield exploration" more commonly known as wildcatting in the Oil Patch.
But what is the point trying to be made by this? Is it that with no discoveries, eventually we lead to shortages? And shortages lead to higher prices? If that is the case, I don't follow the logic as it seems to leave demand out of the equation. Oh sure, anecdotal evidence suggests the physical market is tight and there is no PMs to be found. OK, perhaps... but I have been hearing that kind of an argument for the last 5 years. Second if demand were so tight them why isn't demand pushing prices higher? Look demand for gold is sort of fungible, it isn't a necessity like crude oil is for transportation. Once it goes out of favor, it can stay there for years.
Then there is the comments about falling production costs. Really? I looked the other day, in response to a post here at the history of production costs. I looked at some old data in my archives, in 2006 "cash costs" were ~326/oz for Yamana and ~390 for CMM. High end guys (AMC.v, CSM) were in the 500+ range back then. I would guess that on a "cash costs" basis, today we are running 900-1000/oz or more on average. That is a doubling of costs at best, a near triple of costs at worst, in 7 years. But "all in sustaining costs" projected by Barrick earlier this year were 1,000 to 1,100 per ounce and THAT on size and economies of scale. So margins have to be tight and cash flows way down. No wonder investors are shying away from the miners.
I will say this, if one has new money to put into the sector, I would think there is value in projects with robust economics. That means we look for HIGH grade projects - those with concentrations over 7.5 gpt for surface pits and over 10 gpt for u/g operations. Of course a critical look at IRRs and NPVs is essential too when projects get to that level. Too often in the last couple of years projects have been evaluated with POG levels that are WAY over the market price today. Are those managers shutting their projects down or keep building? We added a LOT of projects that qualified "at the margin" - in other words were economical at the next marginal dollar as prices were rising. Well they ain't rising no more. And what we saw from the majors at the end of last year and earlier this year was a massive re-justification of projects and elimination of those "at the margin."
So yeah, there MAY be some opportunity to pick and choose some projects and have them build value as they go from exploration into development. But chasing low grade projects with high cash costs and expecting falling production prices to make them profitable seems a stretch. I mean really? If we get into a deflationary spiral, where costs for miners drop drastically, then does one really expect commodities to rally wildly?
eh, like I said...thinking out loud, fwiw. |
