New gold reserve discovery remains well below the industry's ongoing needs

In a recently released study, Canada's Metals Economics group shows that the major gold miners are not replacing resources through new exploration, but rather through acquisition, expansion and upgrading of existing or already known operations.

FUNCHAL, MADEIRA - 

While much has been said about the scarcity of new major gold discoveries, particularly in areas of low political risk, a recent study by Canada's well respected Metals Economics Group (MEG) brings statistical evidence to flesh out the more generalised figures which have previously been available

The study, entitled 'Strategies for Gold Reserves Replacement', has concluded that between 1999 and 2008 the world's largest gold producers (classified as those with production of 450,000 oz or more in 2008) overcame rising costs, equipment and labour shortages, electrical outages, wars, permitting hurdles, typhoons, political opposition, and other obstacles to replace almost twice their reserves lost through production. This group's average cost of replacing reserves through a combination of acquisitions and exploration was $83/oz.  At the same time, this group also increased its aggregate production by a total of 10.7 million oz/y of gold, and together accounted for about 55% of 2008 world gold production. 

All this was achieved despite the group's average annual cost of producing and replacing gold-incorporating operating costs, capital costs of new mines, sustaining capital costs at existing operations, and reserves replacement costs-more than doubling over the decade. Although, reckons MEG, some increased costs were voluntary (mining lower-grade ores to prolong mine lives and accelerating capital investments for new mines in response to rising prices, for example) and there are signs that costs are beginning to decline, it was only the tripling of the gold price from the lows of the early 2000s to an average of $872/oz in 2008 which has prevented a financial meltdown in the gold mining sector like that seen in part in base metals over the past year..

MEG goes on to point out that in addition to higher costs, exploration programmes are encountering increased risks from political and regulatory instability in many developing nations.  These countries tend to have inferior infrastructure, less political stability, and uncertain security of tenure-all leading to slower mine development at higher costs. In the current industry-wide gold pipeline (1.7 billion oz of gold in reserves and resources in the 228 advanced-stage non-producing projects analysed) only 19% is in lower-risk jurisdictions, 57% in medium-risk areas, and 24% in high-risk jurisdictions.

Globally, 62 significant discoveries (each containing at least 2 million oz of gold in total reserves and resources) have been reported so far in the 1997-2007 period. These discoveries contain a potential 377 million oz of gold in anticipated recoverable reserves-less than half of the estimated world gold mine production during the same period.  Even anticipating additional reserves from these and smaller discoveries, the industry's new discovery rate still falls well short of what is needed over the long term.  As a group, the major producers developed more than 90% of their exploration-derived reserves by upgrading resources at previously acquired projects and mines or at older discoveries, rather than from recent discoveries.

Increased production by the major gold producers over the past decade, says MEG, has resulted in a greater need to add to reserves in order to maintain a life-of-production that satisfies the long-term views of investors and market analysts. This challenge is further exacerbated by the majors' larger size requirements for new projects. 

Based on 2008 production, the major producers need to replace an average of almost 2 million oz/year of reserves, ranging from a high of almost 8 million oz annually for Barrick Gold to about 500,000 oz for those companies at the bottom of the list.  Although, as a group, the major producers successfully replaced almost twice their total production over the past ten years, almost all of these reserves additions were achieved through acquisitions or by upgrading resources at existing projects and mines, and not through finding new significant discoveries.

 MEG's Strategies for Gold Reserves Replacement study provides an analysis of gold reserves replacement and growth strategies from both exploration and acquisition perspectives. The examination of current and historical transactions involving advanced-stage gold projects, operating mines, and companies, addresses key growth-strategy issues facing the gold mining industry sector, and compares the relative costs of discovering or acquiring gold in the ground. 

For more details on this study and for subscription information visit the MEG website at www.metalseconomics.com; phone (902) 429-2880; fax (902) 429-6593; email sales@metalseconomics.com.

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