Gold deposits beg for capital

Who needs new gold discoveries, when 43 companies have outlined 427m ounces of unmined gold, valued at a mere average US$58/oz?

Author: Barry Sergeant
Posted: Thursday , 22 Oct 2009

JOHANNESBURG -

It sometimes seems that the higher the gold bullion price rises (certainly in dollar terms), the stranger the stories that come out about gold bullion (of course), but also about gold miners, explorers and developers. Just this week, Marc Davis, wrote that: "Only a tiny handful of huge gold discoveries have been made worldwide in the last decade, which experts say is because virtually all the juiciest low-hanging fruit has been picked some time ago".

No doubt that is true, but there are other things that could also be true. Leaving aside recent discoveries for a moment, a good number of the world's biggest gold deposits are not being mined to the full, or not being mined at all. The top runners include the Witwatersrand Basin, still the world's biggest gold province, but with the metal found increasingly at depth, where it may be uneconomic from a cost viewpoint, and simply too dangerous to extract.

Then there is Muruntau (which also contains silver), Grasberg (primarily copper, owned and operated by Freeport-McMoRan), Olympic Dam (copper, uranium, BHP Billiton), Pebble (copper, Northern Dynasty and Anglo American), Natalka (Polyus), Sukhoi Log (Polyus, maybe), Oyu Tolgoi (copper, Ivanhoe Mines, and Rio Tinto), Reko Diq (copper, Barrick), and Lihir.

The Russian deposits mentioned have been in the cold, so to speak, for years, while Olympic Dam is not being mined, as yet, to full potential. The over-promoted Oyu Tolgoi, yesterday's model, appears ready to go ahead, while Reko Diq remains a project, for now.

The challenge is not so much finding new gold deposits, but finding ones that can produce serious free cash flow. Despite record high dollar gold bullion prices, few gold miners anywhere in the world are producing genuine free cash flows. Barrick, the world's biggest gold miner by production, market value and reputation, has topped up its coffers by US$5.25bn in the past few months, after raising US$4bn in a rights issue, and raising a further US$1.25bn in a corporate bond issue. In March this year, Barrick raised US$750m in corporate bonds. This week, Barrick announced the completion of a corporate review that could save around US$80m a year.

Times are tough, all right. In May this year Barrick announced the go-ahead for the US$3bn Pascua Lama project, straddling high country in Argentina and Chile. Barrick has a full pipeline of other projects, but appears to be increasingly challenged by funding issues. Like most other established gold miners, Barrick has been running its business for some years now by topping up funding from one or more of three choices: fresh capital issues, fresh net debt, or asset disposals.

As for the apparent dearth of fresh discoveries, there are hundreds of millions of established gold ounces waiting for project funding for mine building. A selection of 43 gold stocks listed around the world renders up a total of 427m ounces of gold resources, valued by investors at an average of US$57.88/oz, a fraction, to push the definition a little, of the prevailing gold price.

Of the 427m ounces of gold mentioned, 47.10m are attributable to Northern Dynasty, which owns half of the Pebble project in Alaska. The other 47.10m ounces of gold at the project belong to partner AngloGold Ashanti. Pebble is a big bastard, all right: 94m ounces of gold, plus 72m pounds of copper, plus 4.8bn pounds of molybdenum, plus quantities of silver, palladium, and rhenium.

And staying in Alaska . . . Novagold holds an attributable 14.70m ounces of gold resource at Donlin Creek. The other 50% of the available ounces are in the name of Barrick, but this remains just a project for now, given the billions of dollars required to build a mine.

Then there is Crystallex's Las Cristinas with 16.90m ounces of gold resources, valued by investors at less than US$5.00 an ounce. Venezuela is proving to be an increasingly difficult nut to crack; just ask Gold Reserve, with 11.84m ounces of gold resource at the Brisas project, valued by investors at just over US$5.00 an ounce.

There are some truly significant gold deposits in safer jurisdictions, such as the Kerr-Sulphurets-Mitchell project in British Colombia, held by Seabridge and boasting 34.50m ounces of gold resource, with 8.5bn pounds of copper, to boot. Seabridge's gold ounces at this project are valued by investors at a modest US$28.30/oz.

Compare that to the US$289/oz valuation for Ivanhoe Mines's attributable 15.80m ounces of gold at the Oyu Tolgoi project in Mongolia, where Rio Tinto stands as the other key partner. On a 100% basis, the deposit also offers 71bn pounds of copper. The market valuations point to Oyu Tolgoi being 10 times or so more valuable than the Kerr-Sulphurets-Mitchell project; no doubt investors would be able to explain the significant discrepancy.

There are also some strangely varying valuations attributable to various projects in Colombia, where some genuine virgin gold discoveries have been made in the past few years, including AngloGold Ashanti's La Colosa. For its part, Greystar has the magnificent Angostura project, with gold resources of more than 15.02m ounces, and growing, but with those identified so far valued at a mere US$20/oz, giving Greystar a full market value of US$294m.

Compare that to Ventana Gold, which has seen its stock price soar more than 25,000% in less than a year on drill results from the historic La Bodega property - an extension of Angostura. This is a convenient time to introduce the notion of "new gold discovery", another nut that can be difficult to crack. In Africa, one particular company has a notorious and vaguely irritating knack of announcing "new" gold discoveries when the property in question has been mined, variously, over many centuries.