Dust flux, Vostok ice core

Dust flux, Vostok ice core
Two dimensional phase space reconstruction of dust flux from the Vostok core over the period 186-4 ka using the time derivative method. Dust flux on the x-axis, rate of change is on the y-axis. From Gipp (2001).

Saturday, November 9, 2013

Junior gold explorers have a structural problem

Exploration geologists spend a lot of their time looking for gold, but probably not much time thinking about it. Admittedly, my sample size is pretty small. I did ask a couple of colleagues why they thought we spent so much time looking for gold, when it was pretty clear that things like copper, zinc, and nickel are more socially useful.

I also never used to think about it, other than the pithy advice I received from an old employer long ago. "I like gold," he said, "because you can always sell it." There isn't the same market risk in gold that there is in iron--you can find a big iron deposit, but there may not be the demand required to justify bringing it into production.

I accepted that the twin notions of gold as money and it being the lowest risk metal to market (but not the lowest-risk metal to find!) were the reason that exploration for gold typically consumes about 50% of the global budget for non-fuel mineral exploration. The same was true for 2012, according to the Exploration Review published in May of this year (log-in required).

Mining Engineering only carries information back to 1996, but over that time gold exploration has dominated all other (non-fuel) mineral exploration. With so much being spent on gold exploration, it's no surprise that there are so many junior gold exploration companies. The question that concerns me now is whether or not this is the normal state for exploration.

As it has been this way for nearly 20 years, one might think that this must represent the normal state. But there has been a growing instability in our economic system for a longer period than this, and this emphasis on gold exploration may be a function of our distorted economy.

As evidence, I submit the following exhibit.

Source (my annotation).

Looking at this chart, the dominance of gold exploration came into effect as a consequence of the rising gold price into 1980; which itself was a consequence of Nixon removing the US dollar from the gold standard. But for the previous 30 years, gold exploration constituted less than 20% of total mineral exploration.

Part of this is logical. Gold rising from $35 to $800 would have attracted a lot of hot money into the sector. Part of this may also be a symptom of financialization of the economy that may have begun in the 1970s.

There has been a lot of commentary of how this cycle we have spent so much money only to discover so little. Part of the reason for our failures to discover is due to the change in the junior business model, which is a reflection of the fact that a single hole no longer creates the kind of pop in a stock that can feed management. Consequently, junior companies have had to fund salaries as well as resource definition through share immensely dilutive share issuances. Added to this is the difficulty of discovering a gold deposit (especially in a world of elevated political risk)--the risk of exploration itself combined with the risk of expropriation or suddenly increased royalties has made the discovery of an economic gold deposit a rare event indeed.

Clearly the emphasis on gold exploration is anomalous. An anomalously large amount of money being invested in one sector--more than is capable of providing an economic return--is the definition of a bubble. It is painful for me to admit this, as I work in the sector. If we allow ourselves to consider this possibility, we may also recognize the justifying statement--"you can always sell gold"--is equivalent to "house prices always go up" or "just buy the nifty fifty".

Just because a bubble has lasted a long time doesn't mean it will last forever. And just because it deflates from 10x normal to only 5x normal doesn't mean that we have experienced all the pain we will ever experience in the sector. We may have to consider that the current pain we are experiencing in the exploration industry is just the beginning of a return to reality. There could be much more pain to come as 80% of junior gold explorecos disappear.

I don't know what juniors are going to do. They can't really go into base metal exploration, at least not under the current financing regime, as they have no credible ability to raise the large amounts of capital to develop their deposits. It may be that the only way for them to survive will be as wholly- or partly-owned subsidiaries of major mining companies.

Eventually sanity will have to return to the economic system--the financialization will be reversed and goods will be manufactured in the developed countries--and the exploration budgets will favour base metals over gold. 

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