Brent Cook worked alongside Rick Rule from the late
90’s to the early 2000’s at Sprott Global Resource Investments Ltd. A respected
geologist and speaker, he is now the author of Exploration Insights.
“The major miners were being slammed with a falling
gold price at the beginning of 2013,” he told me earlier this year. “They
wanted to mitigate the damage to their share price. ‘What can we do to attract
investors?’ they asked.
“Their best idea was to lower expectations as much
as possible. They felt that if they lowered expectations related to production,
costs and profits, then at year end they could beat, or at least meet those
expectations.”
How did that work out?
“Well, to a large extent, they managed to meet or
beat the lowered guidance for 2013, and the analysts were able to brag about
the new numbers.
“Sort of, that is. They know very well that this
game can’t go on, because even with lowered expectations we are seeing
additional write downs and decreased mine reserves. They are saying that these
cuts are for the better anyway. This time they are ‘serious’ about bottom line
earnings – yeah right!”
Since then, many major mining companies have
published dismal returns for fourth quarter of 2013, and cut their reserves
because many of their unmined reserves were uneconomic at their revised gold
price estimates.
For instance, Goldcorp Inc. showed a $1 billion
loss in the fourth quarter of 2013, and reduced its gold reserves by 15 percent
because of a lower gold price assumption of $1,300 per ounce.1Newcrest
Mining Ltd. saw its profits decline by around a third from a year ago, and cut
reserves by 11 percent with a gold price assumption of $1,250 per ounce.2 Barrick
Gold Corp. had a $2.83-billion net loss for the fourth quarter of 2013.3 The
heavyweight reduced the amount of reserves on its annual statement by 26
percent assuming gold would be around $1,100 instead of $1,500 going forward.
As bad as the majors’ performance has been, they
must attempt to expand their existing operations – especially if higher metals
prices offer some relief, Brent explained.
The problem is that reserves are becoming much
harder to come by even if metals prices rise, he said. As the ‘best’ deposits,
which are easy to access and have high grades, are mined out, the new deposits
that are being discovered today tend to be more expensive and complicated to
mine.
The following graph from Exploration
Insights shows how new discoveries are getting deeper on average; the
closer to surface, the more likely a deposit has already been found and mined
out.
It takes more time, drilling, and money to find
these new deposits. They are getting rarer. Majors will likely have to pay more
to acquire these new mines that they need.
Right now they are still shell-shocked, but
eventually they have no other choice if they wish to stay in business; so
juniors that can prove up fresh economic deposits should fetch higher and higher
prices in the market, says Brent.
These projects will also be more expensive to mine
as open-pit projects because the ‘cover’ will be mostly waste. Underground
mines are likewise becoming more costly to mine due to a number of factors.
Thus, majors could struggle with higher costs and fewer available deposits to
replace depleted reserves.
“There’s no technology out there that can
drastically improve the odds of finding new deposits. It really comes down to a
technical team’s ability to accurately interpret a limited amount of data and
cost effectively find or kill their mineral project.
“I believe that the best place to invest in the
mining space is in the companies that have recently made a discovery that has
the potential to become bigger and be high grade. For this reason, new deposits
that are currently being proven out offer some of the biggest upside, in my
opinion.”
P.S.: Brent recently posted a ‘Rules of Thumb’
guide for interested speculators to his website that he says will help filter
the legitimate explorers from the posers. Click here to read.
Upcoming conference: See Rick
Rule and meet the Sprott team at the Oxford Club’s 16th Annual
Investment U Conference at the exquisite Park Hyatt Aviara in Carlsbad,
California from March 26-29, 2014.
And come in early for our Sprott Open House on
March 25th. For more details on the conference please take a look at the website or
to register, please contact Opportunity Travel today by phone at 1.800.926.6575
or email at info@opportunity-travel.com.
Brent Cook currently authors Exploration
Insights, where he analyzes specific companies in the small-cap natural
resource sector and serves as an advisor in mining economics and exploration
potential for funds and companies. He has worked in over 60 countries across a
wide number of geological environments for major mining companies including
Kennecott Mining, Rio Tinto Mining, Barrick Gold, and Freeport McMoran.
1 http://www.kitco.com/news/2014-02-13/Goldcorp-Posts-4QLoss-Cuts-Gold-Reserves.html
2 http://www.reuters.com/article/2014/02/14/australia-newcrest-earnings-idUSL3N0LI6GW20140214
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