In my July 2013 presentation to the GSSA I looked at the long term outlook for mineral exploration. This keynote paper and presentation to the NewGenGold Conference focuses on the outlook for gold. It also discusses a number of generic survival strategies for exploration companies.
- Global spending on gold exploration peaked at $10.0 billion in 2012. After adjusting for inflation, this figure is 30-times higher than what it was in 1975.
- The main factors driving the level of expenditure are the gold price (and price volatility) and long-term economic growth.
- A multi-factor regression model was built to predict the likely level of exploration expenditures. Under Depending on the gold price scenario chosen (varying from US$800 to $1800/oz in constant 2012 US$) global expenditures on gold in 2020 could vary from $5.9 to $11.6 billion.
- Over the last decade (2003-2012) 238 primary gold deposits (> 0.1 Moz) were found in the World, containing a total of 737 Moz. In addition, 67 (mainly base metal) deposits were found containing 156 Moz of gold as by-product metal.
- Comparing the level of expenditures over the last four decades versus the number of discoveries shows that the two move together. However in the last five years a major gap has opened up - and it now costs twice as much to make a gold discovery as it did previously. This is driven by the recent doubling of input costs – such as drilling, salaries for geologists and administration.
- Higher gold prices have made it economic to mine lower grade deposits. The resulting lower cut-off grades effectively increase the reported size of the resource. It also enables geologists to revisit (and drill-out) prospects that had been previously discarded as being sub-economic. The reverse applies in a period of low gold price. It also impacts on the preferred type of deposit style explored for.
- The recent volatility in gold prices has created problems for those investors seeking to assess the future prospects of gold companies. A study of 50 current published Resource Statements found that the price used varied from $800 to $2000 per ounce. Consequently, there is a clear risk that the published resource figure may not reflect its true size and potential value.
Given the negative outlook for price and exploration, companies need to develop new strategies to survive the current downturn and position themselves for growth in the longer term. Three generic strategies to consider are:
- Cost Leadership Strategy: Develop exploration techniques and management systems that lower the effective cost per discovery.
- Differentiation Strategy: i.e. follow a different path to your competitors.
- Niche (or Focused) Strategy; Simplify the business by focusing on a limited number of locations/countries/commodities/deposit styles in the exploration portfolio. The aim is to choose the best projects and reduce the amount of money spent on overheads.
The preferred strategy chosen will depend on the local circumstances – which will obviously vary from company to company.