Peak Gold Output Looms as ‘Big Money’ Flocks to Gold Juniors

By Marc Davis, www.BNWnews.ca

With bullion prices at all-time highs and world-class gold discoveries becoming ever more elusive, the investment industry is gambling increasingly sizeable sums of money on major mines-in-the-making. A recent example of this new trend involves Exeter Resource Corporation (TSX.V: XRC) (NYSE-A: XRA). Specifically, a handful of top-tier investment banks snapped up the high-flying mining junior’s CDN $57.5 million equity financing last month in less than 24 hours.

Of Exeter’s war chest, a sizeable amount is being used to develop one of the world’s largest gold discoveries in recent years. The Caspiche gold/copper deposit in Chile is a veritable monster that weighs in at 33.7 million gold ‘equivalent’ ounces. (This ‘equivalent’ metric involves silver and copper by-product metals that are valued using baseline prices of US $12 for silver and US $2.00 per pound for copper, while US $800 is used for the gold valuation).

Stated another way, Caspiche boasts an inferred resource estimate of 19.8 million ounces of gold, 40 million ounces of silver and 4.8 billion pounds of copper.

The amount of money poured into Vancouver-based Exeter Resource is a clear indication that multi-billion dollar hedge funds are beginning to diversify into gold exploration companies – at least the ones that have especially large in-development gold assets. This is because these gold stocks are increasingly assuming a newly-found collective role as a powerful inverse proxy to the weakening US dollar. In this regard, they are proving as attractive as gold bullion, itself. And though they are far riskier investments when compared to owning physical gold, they have been offering much greater returns as of the past few months.

Indeed, this reality appears to be the big attraction for the participants in Exeter’s financing. To date, their identities have not been disclosed by the Canadian underwriting syndicate, but they apparently include some marquee names among US and European investment funds. This is according to an investment banker who wishes to remain anonymous as he is not authorized to talk to the media.

“Notably, this financing includes one of the world’s largest hedge funds. This fund has only been investing in gold stocks as of recently, but this has already started a trend among large more ‘macro generalist’ institutional investors,” our source says.

This emerging trend among the type of big league money managers who have mostly ignored the gold sector for many years has not gone unnoticed by Exeter.

“This latest financing was fully subscribed literally overnight. Its size was a surprise to some people,” Exeter’s Executive Chairman Yale Simpson tells BNWnews.

“Our previous smaller financings were dominated by resource funds that are specialists in the gold space,” he adds. “This time, I believe we’re dealing with much more mainstream players than has traditionally been the case. And these are funds that obviously believe that either our gold resources will continue to build substantially or that gold prices are still heading significantly higher – or both.” 

Furthermore, the apparent appetite among institutional investors for a piece of Exeter may also be an indication that the theory of ‘peak gold’ is beginning to win over converts. Especially since the CEO of the world’s largest mining company, Barrick Gold, recently added credence to this argument.

Aaron Regent told a gold investment conference in London last month that major gold mining companies are continually struggling to replace mined-out reserves. Especially their high-grade ore, much of which was severely depleted when gold was fetching much lower prices.

The problem is that fewer and fewer world-class gold deposits (at least five million ounces in size) are being found. The current success rate is about one per year, regardless of how many companies are hunting for them and the approximately US $4 billion per year that is being spent in this quest.

“There is a strong case to be made that we are already at peak gold," Regent said. "Production peaked around 2000 and it has been in decline ever since. And we forecast that decline to continue as it is increasingly difficult to find ore." 

The facts certainly seem to back up Regent’s argument. For instance, global gold output has been dwindling by nearly 5% per annum since it peaked in 2001, even though bullion’s spot price has virtually quadrupled since then. In the world’s mature gold fields the situation is even worse. For instance, in North America output has dropped over the last decade from 17.06 million ounces in 1998 to 10.59 million ounces in 2008 – an extraordinary 60% plunge.

Hence, prospectively world-class discoveries are becoming increasingly important to hungry mining majors with deep pockets. Especially since about three quarters of all significant discoveries are made by exploration-oriented mining juniors.

That is why we are increasingly seeing small companies with lucrative gold finds being gobbled up by mid to major sized gold producers. Exeter is unlikely to be an exception. Before that can happen Exeter’s management says it is exploring ways to add significantly more value to Caspiche by way of additional detailed drilling and mine planning.

There has even been speculation that the company could spin off and commercialize its small but very high grade Cerro Morro gold/silver deposit in pro-mining Argentina. To date, the deposit has an inferred resource is 646,000 ounces of gold that includes the rich Escondida vein, which contains 518,000 gold equivalent ounces at a grade of 34 g/t gold.

The company plans to advance this resource to the more reliable ‘indicated resource’ category during 2010, while also targeting a resource expansion to over one million gold ounces. The deposit is scheduled to be in production by 2011. Over time, it is expected to continue to grow significantly in size due to its largely untapped overall potential, Simpson says.

Yet, the Caspiche deposit is an entirely different situation as it is far too large for Exeter to go it alone, Simpson says.

Market observers suggest it could cost upwards of one billion dollars to commercialize. But that would be a relatively small price to pay for a giant multinational mining company that needs to produce as much as several million ounces of gold each year just to keep pace with its rivals.

Such potential suitors are not far away. The deposit is sandwiched between Kinross Gold’s 6.2-million-ounce Maricunga Mine and the in-development Cerro Casale mine in-the-making. Jointly owned by heavyweights Barrick (TSX: ABX) (NYSE: ABX) and Kinross (TSX: K) (NYSE: KGC), Cerro Casale is huge, boasting a 23-million-ounce gold resource, along with six billion pounds of copper.

Ultimately, significant economies of scale could be realized if the major players get together to share mining infrastructure in the area. Kinross and Barrick are the obvious candidates. But given the size of Caspiche, any of the world’s major gold miners could commercialize it.

“Due to its size, Caspiche has heightened appeal to major mining companies, of which nine have already signed confidentiality agreements with us. All would like to be considered when we do a transaction,” Simpson says.

For the mean time, Exeter appears to be happy to go it alone as the company is convinced that there is considerably more value in the deposit that has yet to be unlocked.

In recent weeks, other major equity financings involving Canadian gold exploration-oriented mining juniors include an $86.33 million shot in the arm for Rubicon Minerals (TSX: RMX); $40 million for Ventana Gold (TSX: VEN); $67.5 million for Gabriel Resources (TSX: GBU); $63.35 million for Greystar Resources (TSX: GSL); and $71.87 million for Collosus Minerals (TSX: CSI).