Junior Gold Exploration 2

By: Scott Wright | Fri, Jun 29, 2012
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Over the course of gold's secular bull the demand for this precious metal has skyrocketed. And as a result gold's primary supply source, mine production, has been forced to respond. Thankfully with the price of gold soaring to all-time highs, there's been no shortage of mining companies hitting the hills to look for the next deposit.

As a result of more and more miners looking for gold, more and more gold is being found. And thanks to an industry-wide boost in capex to develop these finds, this bull's exploration cycle has recently started to bear its fruit. This fruit is production growth for three years running, including a 2011 tally that came in at an all-time high.

In peeling away the layers of this production growth, it is no doubt interesting to see where in the world gold's mined supply is coming from. And thanks to detailed country-level production data provided by various government geological agencies and private consultancies, we've been able to see exactly how global gold-mining trends have played out.

Interestingly from a production standpoint our current gold bull has a radically-different look than those in the past. We've seen powerhouse countries of yore take huge falls from mining grace, while other countries that had not been known for their gold mining have grabbed this bull by the horns to turn out huge production increases.


By definition junior explorers are companies that are either searching for gold deposits, or are in the process of proving up the economics of the ones they've found. With their exploration-focused models they don't contribute to supply. But while these juniors aren't spinning out cash flow, their spinning at the drill bit is a crucial part of the global supply chain.

Unfortunately broad exploration data is extremely hard to come by. Unlike production data, there just isn't a public formal tracking mechanism that collectively shows where in the world the juniors are concentrating their efforts. Fortunately at Zeal we've diligently tracked juniors for the better part of gold's bull. And we've built up a massive database that among many data fields shows where each junior's projects are located. This allows us to collectively see where this sector is doing its work.

In general we focus on juniors that have their primary stock listings in the US or Canada. And since these markets tend to be the world's premier destinations for resource companies looking to raise capital, their constituents offer a fair representation of global exploration trends. Per our latest research cycle, we've accumulated data on nearly 700 junior gold explorers that operate thousands of projects all over the world. And as you can see in the map below, the concentration of projects is not as one would expect.

Junior Gold Exploration Map


With the world's top-ten producers spread across five different continents, it is clear that gold mining is a global affair. But what immediately sticks out is the perceived inactivity in the world's most-productive continent. Asia is host to four of the world's top-ten producers, with just these four accounting for a whopping 28% of 2011's 2700 metric tons produced. Yet in terms of junior exploration, this part of the world isn't seeing much play.


And in general this means is exploration being performed by either state-owned or domestically-based private companies. Even though many Asian countries are under authoritarian rule and thus close their borders to outsiders, they aren't blind to gold's powerful bull. China, Russia, and other Asian powerhouses aren't afraid to aggressively exploit their natural resources in order to line their coffers with gold.



Interestingly though Australia's low project percentage is driven by a different set of circumstances than what we are seeing in Asia. First is Australia is host to one of the world's only other resource-friendly stock exchanges outside of the US and Canada. As one of the world's top gold producers (currently #2 behind China), Australia's investors have long had a strong cultural affinity to gold stocks. And as a result, most locally-based mining companies don't need to list elsewhere to procure investor capital.

From an outsiders' perspective Australia does have some operational, geological, and geopolitical factors that tend to dissuade investment. On the operational front this country is struggling with soaring mining costs. Part of this has to do with rising labor and energy costs, while part is attributable to lower grades due to the fact that much of Australia's low-hanging fruit is gone. On the geopolitical front the barriers to entry aren't high compared to other countries, but some recent policy issues (especially in regards to taxes/royalties) have been a turn-off to the explorers.


Overall considering Africa's vast mineral wealth, it is a shame it doesn't attract a higher percentage of junior explorers. And the main reason for this is heightened geopolitical risk in nearly every country on the continent. Unfortunately we've seen every possible scenario of geopolitical shenanigans play out in Africa over the last decade.

From resource nationalization, to civil war, to unreasonable tax/royalty regimes, to overbearing environmental regulation, the miners have seen it all. And one common theme that leads to these issues is central-government instability. Unfortunately many of Africa's governments are too busy trying to stay in power to realize what investment in their natural-resources sectors could do for their economies.


As recently as 1970 South Africa was responsible for over two-thirds of the world's gold production. But over the years a variety of factors (a national power crisis, lower ore grades, higher labor costs, currency issues, and ridiculous government policy among the many) have contributed to a huge fall from mining grace.

Incredibly in 2011 South Africa had slipped to fifth in global mine-production rankings, sporting an 80%+ drop in volume from its high, to its lowest output in nearly a century. And its foolish government still doesn't get it as it currently tosses around the idea of mine nationalization or a 50% mining windfall-profits tax. It's no wonder junior explorers won't touch this country with a ten-foot pole!


In Peru for example mining is the linchpin of its economy. It has long embraced foreign investment, and the mineral-rich Andes Mountains that span this country have long been attractive to global explorers. As a result, Peru is South America's leader in both exploration and production (world #6).

Other popular destinations for the junior explorers are the strong producer nations of Brazil, Chile, and Argentina. Around 50 juniors hold projects in these countries, and some big discoveries have been made in them over the course of this bull. But perhaps some of South America's finest discoveries are being made in Colombia, one of gold's newest exploration frontiers.







In the US there are over 100 juniors exploring for gold via both brownfields and greenfields methods. Nevada and Alaska are of course the bellwether locales, but the juniors are also finding excellent success in such places as South Carolina, Idaho, and California. Overall the US's strong exploration has led to its first production increase in ten years in 2011.


A huge increase in Mexican exploration over the last decade has led to a 254% increase in production, vaulting it up the charts to where it is now the world's 11th-largest producer. And with over 75 juniors currently exploring and developing in Mexico, its impressive growth trend ought to continue.


Not represented on this map since they don't have top-ten producers are Europe and Central America. But it certainly doesn't mean there isn't exploration going on in these regions. In Europe there are dozens of juniors operating projects in 13 different countries. And in Central America there are over a dozen juniors exploring in six of its seven countries. There are even several juniors with projects on the orphan island of Hispaniola (the Dominican Republic and Haiti).

Overall there are several things we can glean from this junior-gold-exploration map. And perhaps the most interesting is that major production centers don't necessarily line up with where the juniors are spinning their drills. While there are some solid juniors doing good work in Africa, Asia, Europe, Central America, and Australia, the real action is in North and South America. And since North America is carrying the load, I suspect we'll see more production growth from this part of the world than any other in the years to come.



But while the juniors spread themselves far and wide, there are definitely popular locales they tend to favor. And interestingly these locales don't necessarily line up with all the major production centers. Currently there is a huge exploration bias towards North America, and this ought to continue to feed major production growth from this continent's big-three countries.



Scott Wright

Author: Scott Wright

Scott Wright
Zeal LLC.com



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