Gold exists all over the world -- just not everywhere is the particular concentration available that is necessary for development of a mine. The earth’s crust contains approx. 0.004 grams of gold per ton and plenty of this metal can even be found in saltwater, just not to an economically reasonable extent. To make a profit with the precious metal, or at least have the prospect of success, we have to look at another area.
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| Drillings at the Pinos Altos Gold project from Agnico-Eagle Mines in northern Mexico; Planned production commencement: Mid 2009. Photo: Agnico-Eagle Mines Ltd. |
Gold panning, just like in the old days of the gold rush, for example, in California, is not an alternative. This natural concentration is not reliable enough nor is it sufficiently substantial for companies. Instead, the search is for, relatively speaking, high gold concentration in the earth, which can be extracted and processed into pure gold.
Such deposits can be found close to the earth’s surface, as well as deeper underground, and combined with other metals such as silver or copper. Where the gold is found determines the method used to develop or extract the gold and determines how high the costs will be as well.
The process begins with geology. With the examination of the various types of rock and their formation in one region and with the numerous samples taken, the geologists determine where it would be feasible for a company to take a closer look. To determine what exactly can be discovered on a piece of property, countless ore samples are extracted with a so-called diamond core drilling method. Particular drills are used, the tips of which, as the name implies, are coated with industrial diamonds.
By examining these samples, the geologists can determine where the ore they’re searching for lies and how it is conjugated with other metals and rock. The engineers then take over and must find the best way to get the metal out of the ground.
Two crucial indications from the samples are the grade and the size of the discovery. This is where the terms “measured and indicated“ resources as well as "proven and probable“ reserves come into play, which you may see so frequently in the company reports.
Areas where gold clearly exists are determined as probable reserves. But it is still uncertain whether or not the development is economically or technically possible. Proven reserves are just what the name implies. The geologists prove there is gold in the samples and the engineers are certain that it can be extracted from the earth. The Canadian government in addition requires the categories “measured” and “indicated,” but this is not recognized by the SEC in the United States.
If you take a closer look at reports from companies such as Agnico-Eagle Mines (TSX:AEM), you’ll find the numbers for all of these categories, because the companies must fulfill the rules and requirements for all countries in which they are active. In any case, these numbers represent the most accurate and honest estimate of the company in reference to the entire existing gold quantity, that could be developed in a particular area within the life of a mine.
This is no guarantee that the gold will be developed or can be developed, but there is a possibility. The higher the gold grade of the ore and the more gold exists, the more cost effective the development can be. And that is, as in all areas of business, an extremely significant factor. In mining, this means controlling how a mine is operated.
This -- open pit vs. underground, extraction, etc. -- is a topic for another day.
Björn Junker, editor in chief of GOLDINVEST.de, has long years of experience in the resources sector through his work as a journalist and public relations consultant to Canadian and U.S. companies. He main focus is the precious metals sector but he is also following global developments of the industrial and base metal markets. Since 2003 GOLDINVEST.de has been offering in depth reports and commentary on the resources sector and select companies from the precious, industrial and base metal areas. We provide daily news on gold and commodity stocks and publish market updates for an ever growing community of German investors with a strong affinity for gold and resource related stories. GOLDINVEST.de is designed to serve as a central point in German speaking countries where investors and financial advisors can obtain reliable knowledge and a sound understanding of the art of investing in mining stocks.
