By Adam Hamilton & Scott Wright 02.07.2012
Over the course of gold’s secular bull the demand for this precious metal has skyrocketed. And as a result gold’s primary supply source, mine production, has been forced to respond. Thankfully with the price of gold soaring to all-time highs, there’s been no shortage of mining companies hitting the hills to look for the next deposit.
As a result of more and more miners looking for gold, more and more gold is being found. And thanks to an industry-wide boost in capex to develop these finds, this bull’s exploration cycle has recently started to bear its fruit. This fruit is production growth for three years running, including a 2011 tally that came in at an all-time high.
In peeling away the layers of this production growth, it is no doubt interesting to see where in the world gold’s mined supply is coming from. And thanks to detailed country-level production data provided by various government geological agencies and private consultancies, we’ve been able to see exactly how global gold-mining trends have played out.
Interestingly from a production standpoint our current gold bull has a radically-different look than those in the past. We’ve seen powerhouse countries of yore take huge falls from mining grace, while other countries that had not been known for their gold mining have grabbed this bull by the horns to turn out huge production increases.
As investors global gold-mining trends are something that we should keenly be aware of. But while geographical production data is useful, it is also useful to attempt to understand where the next generation of gold mines is likely to come from. And one of the best ways to do this is to find out where in the world the junior explorers are spinning their drills.
By definition junior explorers are companies that are either searching for gold deposits, or are in the process of proving up the economics of the ones they’ve found. With their exploration-focused models they don’t contribute to supply. But while these juniors aren’t spinning out cash flow, their spinning at the drill bit is a crucial part of the global supply chain.
Unfortunately broad exploration data is extremely hard to come by. Unlike production data, there just isn’t a public formal tracking mechanism that collectively shows where in the world the juniors are concentrating their efforts. Fortunately we’ve diligently tracked juniors for the better part of gold’s bull. And we’ve built up a massive database that among many data fields shows where each junior’s projects are located. This allows us to collectively see where this sector is doing its work.
In general we focus on juniors that have their primary stock listings in the US or Canada. And since these markets tend to be the world’s premier destinations for resource companies looking to raise capital, their constituents offer a fair representation of global exploration trends. Per our latest research cycle, we’ve accumulated data on nearly 700 junior gold explorers that operate thousands of projects all over the world. And as you can see in the map below, the concentration of projects is not as one would expect.
Highlighted on this map are the world’s ten largest gold producers, which account for about two-thirds of total mine production. And displayed next to these countries is the percentage of junior explorers that own projects within their borders. Also displayed on this map is a project percentage breakdown by respective continent, inclusive of all projects within that continent. And by our count, the juniors are currently exploring in 73 different countries.
With the world’s top-ten producers spread across five different continents, it is clear that gold mining is a global affair. But what immediately sticks out is the perceived inactivity in the world’s most-productive continent. Asia is host to four of the world’s top-ten producers, with just these four accounting for a whopping 28% of 2011’s 2700 metric tons produced. Yet in terms of junior exploration, this part of the world isn’t seeing much play.
Provocatively this lack of play is counterintuitive considering Asia’s output, especially in view of the production growth seen in China and Russia over the last decade (+92% and +31% respectively). Though the juniors seeking investment capital in the stock markets appear to stay away from Asia, there is clearly another means of exploration feeding its growth.
And in general this means is exploration being performed by either state-owned or domestically-based private companies. Even though many Asian countries are under authoritarian rule and thus close their borders to outsiders, they aren’t blind to gold’s powerful bull. China, Russia, and other Asian powerhouses aren’t afraid to aggressively exploit their natural resources in order to line their coffers with gold.
Overall with a total of only about 4% of all juniors owning a project in Asia, it is clear that the barriers to entry are too high for most to stomach. And unfortunately with the stigma of big geopolitical risk associated with operating in this part of the world, the juniors that are brave enough to venture there tend to see their stocks trade at discounts to their peers.
Australia is another country that is seeing a surprisingly small amount of junior exploration. Amazingly only about 1% of the juniors in our pool own a project within its borders, with the number jumping to 2% if I include projects in neighboring Papua New Guinea, New Zealand, and Tasmania.
Interestingly though Australia’s low project percentage is driven by a different set of circumstances than what we are seeing in Asia. First is that Australia is host to one of the world’s only other resource-friendly stock exchanges outside of the US and Canada. As one of the world’s top gold producers (currently #2 behind China), Australia’s investors have long had a strong cultural affinity to gold stocks. And as a result, most locally-based mining companies don’t need to list elsewhere to procure investor capital.
From an outsiders’ perspective Australia does have some operational, geological, and geopolitical factors that tend to dissuade investment. On the operational front this country is struggling with soaring mining costs. Part of this has to do with rising labor and energy costs, while part is attributable to lower grades due to the fact that much of Australia’s low-hanging fruit is gone. On the geopolitical front the barriers to entry aren’t high compared to other countries, but some recent policy issues (especially in regards to taxes/royalties) have been a turn-off to the explorers.
With 8% of the junior population owning a project in Africa, this continent is definitely seeing more play than Asia and Australia. And this play is spread across 24 different countries, from big producers like South Africa and Ghana to countries like Gabon and Sierra Leone that are seeing their first modern exploration.
Overall considering Africa’s vast mineral wealth, it is a shame it doesn’t attract a higher percentage of junior explorers. And the main reason for this is heightened geopolitical risk in nearly every country on the continent. Unfortunately we’ve seen every possible scenario of geopolitical shenanigans play out in Africa over the last decade.
From resource nationalisation, to civil war, to unreasonable tax/royalty regimes, to overbearing environmental regulation, the miners have seen it all. And one common theme that leads to these issues is central-government instability. Unfortunately many of Africa’s governments are too busy trying to stay in power to realise what investment in their natural-resources sectors could do for their economies.
Thankfully there are some exceptions to the rule. Though far from perfect and not without risk, countries like Ghana, Tanzania, Burkina Faso, and Mali tend to be mining-friendly and thus attract a lot more junior exploration than other countries, especially more so than Africa’s top producer.
As recently as 1970 South Africa was responsible for over two-thirds of the world’s gold production. But over the years a variety of factors (a national power crisis, lower ore grades, higher labor costs, currency issues, and ridiculous government policy among the many) have contributed to a huge fall from mining grace.
Incredibly in 2011 South Africa had slipped to fifth in global mine-production rankings, sporting an 80%+ drop in volume from its high, to its lowest output in nearly a century. And its foolish government still doesn’t get it as it currently tosses around the idea of mine nationalisation or a 50% mining windfall-profits tax. It’s no wonder junior explorers won’t touch this country with a ten-foot pole!
In South America we can start to see some real exploration action. With well over 100 juniors exploring every major country on this continent, we get a tally of 16% of all juniors owning a project there. As for its constituents, there are definitely countries that have major strategic advantages over others.
In Peru for example mining is the linchpin of its economy. It has long embraced foreign investment, and the mineral-rich Andes Mountains that span this country have long been attractive to global explorers. As a result, Peru is South America’s leader in both exploration and production (world #6).
Other popular destinations for the junior explorers are the strong producer nations of Brazil, Chile, and Argentina. Around 50 juniors hold projects in these countries, and some big discoveries have been made in them over the course of this bull. But perhaps some of South America’s finest discoveries are being made in Colombia, one of gold’s newest exploration frontiers.
Interestingly Colombia is no stranger to gold, with mining dating way back to the pre-Columbian era. But as a result of a major rough patch for this country that spanned nearly the entirety of the second half of the 20th century, its massive gold fields had seen very little modern exploration.
Thankfully Colombia’s geopolitical scene started seeing radical improvements over the first decade of the 2000s. And as a result, this country has been experiencing a modern-day gold rush. Juniors and majors alike have made some big discoveries, and we ought to see Colombia jump way up the producer rankings over the next decade as they are developed.
Of course South America does come with its fair share of red-flag countries, the most notorious being Venezuela. Venezuela is blessed with simply massive known gold deposits, along with numerous prospects. But unfortunately its Hugo Chavez-led Marxist movement has led to a rampant resource-nationalization campaign that is enough to scare away most foreign investment. And sadly other countries like Bolivia have followed suit.
Next we venture to North America, where we are seeing by far the most activity on the junior-exploration front. Incredibly 71% of juniors own a project in North America, with over half owning a project in Canada, 17% in the US, and 11% in Mexico. And the juniors are descending upon this continent for good reason as all three major countries have a solid mix of rich gold-mining history, large underexplored mineral belts, and low geopolitical risk.
In Canada the junior explorers have been flocking there in droves. And they are finding immense brownfields and greenfields success. On the brownfields front the explorers are reviving past-producing districts where historic gold deposits still have plenty of the shiny stuff remaining. They are also uncovering major new deposits underneath and adjacent to these districts. There’s no better place to look for gold than where it is already known to exist!
On the greenfields front the explorers are making major new district-scale discoveries all across the country. Many of these discoveries are being made within the large greenstone belts housed within the Canadian Shield that covers most of Ontario and Quebec. And many more are being made in remote frontier areas like the Yukon, British Columbia, and Nunavut.
In the US there are over 100 juniors exploring for gold via both brownfields and greenfields methods. Nevada and Alaska are of course the bellwether locales, but the juniors are also finding excellent success in such places as South Carolina, Idaho, and California. Overall the US’s strong exploration has led to its first production increase in ten years in 2011.
Interestingly it is Mexico that is probably the best story of this gold bull so far. This country actually has a much longer gold-mining history than the US and Canada, with its rich precious-metals belts having been exploited for well over 500 years. And with thousands of historic workings acting as virtual treasure maps, the modern explorers haven’t had a problem finding the gold.
A huge increase in Mexican exploration over the last decade has led to a 254% increase in production, vaulting it up the charts to where it is now the world’s 11th-largest producer. And with over 75 juniors currently exploring and developing in Mexico, its impressive growth trend ought to continue.
In all North America was responsible for 16% of mine production in 2011. And with year-over-year production growth of an impressive 9%, well above the global average, along with a bevy of ongoing junior exploration, North America will be pumping out a slew of new mines.
Not represented on this map since they don’t have top-ten producers are Europe and Central America. But it certainly doesn’t mean there isn’t exploration going on in these regions. In Europe there are dozens of juniors operating projects in 13 different countries. And in Central America there are over a dozen juniors exploring in six of its seven countries. There are even several juniors with projects on the orphan island of Hispaniola (the Dominican Republic and Haiti).
Overall there are several things we can glean from this junior-gold-exploration map. And perhaps the most interesting is that major production centers don’t necessarily line up with where the juniors are spinning their drills. While there are some solid juniors doing good work in Africa, Asia, Europe, Central America, and Australia, the real action is in North and South America. And since North America is carrying the load, I suspect we’ll see more production growth from this part of the world than any other in the years to come.
The bottom line is gold exploration has grown increasingly popular over the course of this bull. Taking to the hills in search of the next generation of gold mines are many hundreds of junior explorers. And they are scouring the planet in their efforts.
But while the juniors spread themselves far and wide, there are definitely popular locales they tend to favor. And interestingly these locales don’t necessarily line up with all the major production centers. Currently there is a huge exploration bias towards North America, and this ought to continue to feed major production growth from this continent’s big-three countries.
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