thought I would put the rest of the article in as it is very...

thought I would put the rest of the article in as it is very good reading

"This can’t go on forever, and how the gap between current mine production of ~83 million ounces and the rapidly declining discovered economic ounces plays out is going to be really interesting and profitable to those of us in the discovery game (Fig. 3).



(Fig. 3: Gold discoveries, production, and the gold price 1990 to 2011. The “gap” represents a serious discovery deficit. [Extracted from my recent San Francisco Hard Assets presentation] Source, Metals Economic Group)

Another interesting data point to ponder when considering the 83 million ounces of annual mine production, is how much it really costs the industry to maintain that production. Over the last six years, the major gold producers have spent 40% of their entire market capitalization building new mines (Fig. 4). In order to sustain that level of production going forward, published capex estimates project that the major miners will need to spend 60% of their market capitalization building the new mines, at a cost of $400 billion---and that figure doesn’t even account for the nearly universal capex blow-out we have witnessed over the past six years. Ouch!



(Fig. 4: Six major producers’ market cap and capex-- past six years and projected six years)

The bottom line

The major gold producers desperately need new, quality gold deposits yet can’t afford to build many of the large deposits they already have on the books. These companies are facing margin squeeze in the form of increasing production and capital costs, taxes, royalties, regulations, etc., and are responding by cutting exploration, firing geologists, and cancelling projects. That is a tough and illogical way to find new deposits.

As for the junior exploration sector, it is in the midst of one of the worst financing environments I have seen and, unless things change drastically over the next six months, faces mass extinctions. Without a new infusion of cash into the sector we will see much less work (exploration) of substance and far too many companies just covering expenses and business lunches.

These situations exacerbate the economic discovery deficit problem the gold industry faces. Therefore, and this is a not a revelation to long time readers of Exploration Insights, the very few companies that have high quality gold deposits should be in more and more demand as this story plays out. Likewise, any exploration company with the property, competence, and cash to discover and define a quality deposit will be in even greater demand, due to the discovery leverage they offer. Conversely, a company with no cash and no property success means no more money and successively lower financings as they head off to the bone yard.

There are currently many junior mining stocks that are, or at least appear, “cheap” scattered across the decimated Venture landscape. They could get much cheaper. How one measures cheap, however, had better be relevant to the real issues at hand: underlying value and quality as opposed to last year’s share price or the price one paid. Specifically these are some of the questions that need to be addressed when considering “cheap”.

What is the realistic size and grade potential of the exploration target? Put another way: is the target worth the effort?
What are the probable mining, processing, and capital costs if a deposit begins to be defined?
What is the most likely metallurgy and recovery for the deposit type?
How are social, environmental, permitting, and political issues being addressed?
What project goals and hurdles need to be reached to confirm the investment thesis, and at what cost?
When and how does the company raise the money to advance the project and at what price?
And the most obvious question: how far will the money they have get them?
Thus, at this juncture it is critical to review your stock holdings in the light of what could prove to be a very difficult period in the resource sector, yet one that offers exceptional opportunity when value is eventually realized sometime down the road. Significant economic deposits have been defined or will be discovered, and mining companies desperate to replace reserves and decrease overall costs will acquire them. There is no second option.

My experience has been that during bear markets like today’s, one can often recognize and purchase deposits at a steep discount while the market wallows in self-pity. This is when ten-baggers are bought; but you had better know the value behind the deposits because there isn’t much dumb money left to buy mistakes."

By Brent Cook
Economic Geologist and Editor Exploration Insights
www.explorationinsights.com