Five years ago, a big investment house like Merrill Lynch would have scarcely thought to mention gold.
But in 2010, the yellow metal is a hot topic.
A September report on gold from Merrill is much in the news today. The research piece is titled "Global Gold M&A Heats Up", and details the bank's suspicions that major gold producers are on the hunt for acquisitions.
The rationale is simple. Rising gold prices are creating a lot of free cash flow for gold producers. But at the same time, global gold output has been falling at an estimated 5% annually.
A big part of the reason is reserves replacement. Large gold deposits are getting harder and harder to find. Majors have been trying to expand their existing mines in order to make up the slack.
But as mines get deeper and more complex, booking new ounces gets expensive. Look at South African major AngloGold. In 2008, the company's costs for expanding existing mines amounted to $239 per ounce. Just to book a new ounce in the ground. Never mind extraction and processing costs.
This was obviously unsustainable. Old mines can only be deepened so much before the costs get too heavy. But the alternative was exploring for new deposits, which is a low-success business.
Anglo found another solution. Go lower grade.
Over the last few decades, many deposits have been discovered that were considered too low-grade to be economic. And there were lots of ideas about where other low-grade deposits might be found. But few of these concepts had ever been followed up, because a discovery of this type was seen as worthless.
But Anglo decided to chase one such lead: porphyry gold projects in Colombia. The Cordillera of the western Americas has long been known for such low-grade gold deposits in places like Chile and British Columbia. And with Colombia being under-explored, there were some good ideas about where more finds might be made.
Anglo's focus on Colombia led to the La Colosa discovery. The deposit is nearly an order of magnitude lower in grade than Anglo's South African mines, running 0.86 grams per tonne gold. But it's huge, containing over 13 million ounces.
The size is a big benefit. Because of the scale involved, Anglo felt they could identify these resources for less than $40 per ounce - much less than the $239 it was costing back home.
This trade-off of size for grade is becoming more common in the gold space. You simply don't find many deposits these days that are both big and high-grade (although there are a few, such as the Fruta del Norte discovery in Ecuador a few years back). But big, low-grade deposits are available. And this is where the majors are increasingly looking in order to grow their reserves.
In fact, the aforementioned Merrill Lynch report names some very low-grade deposits as likely takeover candidates. The bank's top pick is Exeter Resource's Caspiche project in Chile, a deposit that grades around 0.5 g/t gold (along with a "kicker" of 0.2% copper).
With higher gold prices, the trend toward "big gold" is going to continue. Majors need reserves. And they're willing to sacrifice grade to get them.
Time to dust off those "uneconomic" projects (and project concepts) for a second look.
Here's to big gold.
Dave Forest is managing director of Notela Resource Advisors Ltd. and writes on crude oil, natural gas, geopolitics, gold and other commodities at Pierce Points.
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