Could Gold Become More Precious? Fair use.
Interview by Robert Graham
Consolidation in the gold sector and low gold prices hurt junior exploration activity, but the juniors in the field are still better off now compared to 18 months ago says CIBC World Markets Gold Analyst Barry Cooper
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"We need gold prices probably in the $360-$375US range to really have a sustainable development situation in the gold industry."
Transcript
IC: Is a crisis brewing in the gold business? At the recent Prospectors and Developers Association of Canada Convention, the Vice-President of Exploration at Barrick Gold said the big gold producers of the world have to spur on exploration spending or gold reserves could run dry within ten years.
For comment and insight, we have on the line Barry Cooper. He’s a gold analyst at CIBC World Markets. Barrick Gold is among the companies that he covers.
Do you agree with the Barrick Gold assessment of exploration activity right now and the possibility of running out of reserves?
Cooper: We’re certainly not replacing that which is being mined today. You know, common consensus numbers out there are about 1.2 billion dollars being spent on exploration around the world. And of course we can derive from that how much gold is actually being found.
And typically, a good figure would be somewhere between 30 and 50 dollars in terms of cost to find an ounce of gold in the ground.
If you use those numbers, it means that we’re finding gold somewhere at a rate of between 25 and 40 million ounces a year, which sounds like an awful lot but we’re mining it at a rate of 90 million
ounces a year. So we’re definitely not filling the hopper.
IC: Why is the industry in this position? What factors have resulted in this problem?
Cooper: Well, two-fold, I guess. First of all, low gold prices. When you don’t have an extra bit of free cash, then guess what? People will cut back on exploration as the first thing because that is discretionary spending.
I guess the second thing that would be a driver for lower exploration is the amount of consolidation that has taken place in the industry.
A lot of these companies, the first thing they announce when they’ve got a merger that’s taking place is that they have operated under the assumption that there’s going to be synergies and they say that basically instead of spending 30 million dollars on exploration each, that combined they’re only going to spend 40 million dollars, which results in the 20 million-dollar saving but it also results in 20 million dollars of less opportunities to find the gold mines.
IC: Are gold prices right now high enough to get this exploration activity under way that Barrick says is needed?
Cooper: They’re probably approaching a level where investor interest starts to get a little bit more piqued. In my view, we need gold prices probably in the $360US to $375US-range to really have a sustainable development situation in the gold industry.
We’re about 30 dollars below that now. So I’d say we’re a little bit shy.
IC: And once they do get to that level that you spoke of, they would have to remain within that range for a period of time, too. The price of gold has been quite volatile lately.
Cooper: It certainly has, and a lot of that is war related. But I see the gold prices rising from hereon, basically a fundamental supply-demand balance that is definitely taking place at this point in time.
IC: Let’s touch a bit about the supply and demand balance. There’s no use in exploring for something if the demand for what you’re looking for is not there. How do you assess the current demand for gold right now and where do you see it headed over the next few years?
Cooper: I guess there are really two types of demand for gold. First of all, there is jewellery demand and that represents about 80 or 85 percent of the market for gold. And that is somewhat price dependent.
If gold prices go up, there will be a fall-off in jewellery demand and indeed, we’ve seen that overall demand around the world in the last quarter or the last half of the year has been lower than what it was in 2001 by about three or four percent. And that is price related.
But then substituting for the jewellery demand, which is quite visible is the investor demand which is more opaque; and we’ve certainly seen an awful lot of investor demand whereby people are coming in and taking positions on gold as both a safety net as well as a true bona fide investment, as an alternative asset class.
IC: How long can it take to get a working mine in place? Barrick talks of maybe global reserves running dry within ten years. It can take that long, can’t it, to get a working mine in place?
Cooper: If we just use Barrick as an example, they probably represent in terms of the assets that they have, both the good and the bad, if you look at their Pierina Mine, it was basically brought into production in about two and a half years, which is a real feat of strength for them in terms of getting everything in place from its drilling it off and what not.
But they also have a project called Bulyanhulu, which while they’ve only had it for a few number of years, the deposit was actually discovered back in the early 1980s. So it took almost 20 years to get into production.
As a rule of thumb, it takes roughly seven years from the time of discovery to get something into production.
IC: In wrapping up, Barry, do junior exploration companies have the resources that are needed to bring about the results that Barrick and others say they need or the global market for gold needs, or do Barrick and the others have to work more closely with the junior exploration firms?
Cooper: Well, traditionally, you’ve always seen support of the majors given to the juniors in one way, shape or form. Whether that’s a personnel that actually gravitate to junior positions – and there’s certainly been an awful lot of that as the entrepreneurial spirit kicks in – but the financial thing is a real aspect that the juniors seek.
And whether they get that from the seniors, which they’re relied on fairly strongly recently, because the broader markets haven’t been there to tap, or whether they get the money directly from the market, I think that would be their preferred avenue.
And certainly, the way gold prices have moved up here, it allows them that avenue much more easily than let’s say we would have seen two or three years ago. So I think they have the resources, or at least they have access to the resources today, more so than they did 12 or 18 months ago. And if gold prices continue to go up, they’ll have even better access.
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