Gold: the Mine Reserve Crisis

July 25, 2017

Regular readers of these commentaries are used to reading material which is ahead of its time, in terms of identifying important trends in precious metals and the overall economy. For readers unfamiliar with mining fundamentals, in order for gold mining companies to be able to maintain steady, efficient production, they require (at least) several years of reserves of ore to process.

These years of reserves are referred to as the “mine life” of that particular mining operation. Obviously mines (and companies) with more years of mine life in their reserves will be healthier than those with less years of reserves.

Between 2012 and 2013 alone, gold mine reserves across the industry plunged by almost 15% -- a huge decline. That was the data which prompted the earlier article. Flash ahead three years, however, and mine reserves have continued their decline, uninterrupted.

Last year was the fifth consecutive year of industry-wide declines in reserves. The cumulative effect of these years of declines? A report from AGF Investments on this subject calculates that current reserves reflect a 30-year low for the gold mining industry.

Think about that.

In August 1999; the price of gold fell to what was (effectively) an all-time low: $251.70 (USD). That was less than 20 years ago. Even at that appalling price level, mine reserves were at a healthier level than today. This supports the argument that in real dollars, the current price for gold (and silver) represents an all-time low .

The reasoning here is simple. Since 2000 (and mostly since 2008); Western currencies – especially the U.S. dollar – have been debauched to complete worthlessness. The only reason why these fraudulent fiat currencies have not already sank to their correct exchange rate (zero) is because of the permanent-and-extreme currency manipulation operations of the Big Bank crime syndicate , a subject of several previous commentaries.

What happens when gold reserves steadily decline? Gold production begins to fall as well. Either some mines run out of reserves altogether and close, or mines simply reduce their production rate to reflect dwindling reserves. In 2016; gold mine production fell for the first time in a decade, and the expectation is for that decline to continue/worsen this year.

What happens if reserves dwindle to near-zero? Mine production collapses completely. A recent conversation with the CEO of a junior gold mining company yielded an interesting observation. Even with the current, abysmal (all-time low?) price for gold, he was very optimistic about the prospects for doing a joint venture with a larger mining company to take his project into production.

Why? Because after years of having their heads up their rears, the bankers who run most of these large gold mining companies have finally figured out that they are in trouble. Their shareholders (and boards) aren’t going to continue to approve their inflated salaries to produce zero ounces of gold per year.

How worried are these senior mining companies? They have even started to do some of their own exploration again. For most of the last 20 years, these banker-operated companies have been content to allow the junior gold miners to do all gold exploration for the entire industry.

The bankers running these senior gold miners would sit around, cheque-books in hand, waiting for some junior gold miner to establish a multi-million ounce gold resource (preferably 10 million ounces or more). Then they would overpay for the project and put it into production themselves. And the shareholders of these miners wonder why they can never make any money holding shares in these companies.

However, with effectively an all-time low for the price of gold, this has represented depression conditions for the junior miners. The temporary rise in the price of gold last year breathed some brief life into the juniors. But at the current depression share prices at which these companies are trading, it is still impossible for them to finance enough gold exploration to halt the continued decline in reserves.

Even with belated interest in exploration from the seniors, and a willingness to lower their threshold for project size (to less than 5 million ounces), at current price levels for gold there is absolutely no indication that the industry can halt either the current decline in production or the continued decline in reserves.

This supply crisis needs to be put into perspective through looking at demand. Gold imports into Asia (mostly China and India) continue at roughly 2,000 tonnes per year – often spiking to higher levels. Note, however, that China also produces more than 500 tonnes per year, with never a single ounce leaving the country.

That accounts for roughly 2,500 tonnes of demand per year. Even with central bank gold purchases dropping off to a rate of ‘only’ about 300 tonnes per year, that accounts for almost all annual supply (currently about 3,100 tonnes).

This leaves virtually nothing for Western gold demand. Nothing for Western jewelry demand. Nothing for Western investment demand, to supply the sales of gold bars and coins from our national mints. This is a market in perpetual deficit (just like silver).

The AGF report referenced earlier was titled “A brighter outlook for gold junior miners”. Indeed, that reflects the anecdote from the junior gold mining executive. However, equally, this is also a brighter outlook for gold prices.

Gold mine reserves today are lower than they were when the price of gold was at $250/oz (USD). The only solution to this crisis is a higher gold price, a much higher price. With capital costs continuing to soar, making the decision to even begin construction of a new mine (and finance it) requires a much higher price of gold for most of the multi-million ounce gold deposits which are not currently in production.

The limited number of high-grade gold projects which could come into production over the medium term at the current price are not sufficient to halt the declines in either production or reserves. Here it is important for readers to understand that higher gold prices impact the reserves of miners in two ways.

How did mine reserves decline by 15% in just one year? Did mining companies use up 15% of all reserves in that period of time? Of course not.

In 2012; the price of gold was in free-fall. The bankers were hard at work reversing bullion prices from their medium term high of over $1,900/oz (USD). As the price kept falling, gold mining companies were forced to re-calculate their reserves.

Grades for gold ore vary considerably. Some (lower grade) ore that can be economically mined at $1,900/oz cannot be economically mined at $1,500 (and certainly not at $1,250/oz). Thus gold mining companies have been forced to revise their reserves down to much lower levels, for any/every mine producing gold at lower grades.

This means that any additional declines in the price of gold would almost immediately exacerbate this crisis even further. However, these dynamics operate in both directions. When the price of gold starts to rise, once that price has advanced significantly, mining companies will be able to revise their reserves to higher numbers, adding additional years of mine life to their projects.

The gold mining industry is in a state of crisis. Only (sustained) higher prices can lead the industry out of crisis. The longer that the banking crime syndicate delays in allowing the price to rise, the more dramatic the increase which will be necessary to raise the industry out of crisis.

This likely bodes well in the near term for those investing in junior gold mining companies, or planning to do so. However, it is yet another reason why investors in bullion can count on a rising price for gold over the medium term.

This doesn’t change the forecast which readers have received previously concerning gold (and silver). Almost certainly bullion prices need to go lower before going much, much higher.

The reasoning remains the same. The bankers’ absurdly inflated paper markets are way overdue for a major crash – along with Western real estate markets . Obviously gold and silver prices will not be allowed to shine as a beacon of stability when the bankers’ paper markets are collapsing.

However, the current crisis in gold mine reserves is yet another reason why the pending take-down in bullion markets must be a brief event. Neither the gold mining industry nor the gold market could sustain any significant drop in price for any length of time. As with the take-down which took place in 2008, bullion holders can expect another V-pattern: a sharp decline accompanied by an equally sharp reversal.

There is a light at the end of the tunnel. And as fundamentals continue to deteriorate in the gold mining industry, that light continues to shine brighter.