On February 7th, I posted the below rant, “Juniors for Sale”, stating that Newmont Mining’s acquisition of Fronteer Gold (FRG) symbolized the Gold/Silver Majors’ giving up on organic growth, as it is not even theoretically possible to replace high levels of gold production with new drilling.
Despite a bull market that commenced in 1999, worldwide gold production peaked between 2001 and 2004 and doesn’t have a prayer of reaching those levels anytime soon, particularly in light of the heightened capital costs, permitting issues, and political risks involved.
The same issue has been run into by every commodity sector in human history, most notable in the oil and gas sector, which has seen at least 50% of ALL companies of reasonable size be acquired in the past decade, perhaps even more. Back in 2005, $30 oil was considered historically high, if that gives you an idea how much that industry has changed.
Per the below commentary from NEM’s earnings report this morning, total gold production is expected to fall by 2%-6% in 2011 from the 2010 levels, while shockingly its copper production is forecast to decline by 33%-42%.
And these declines follow capital spending of $1.8 billion in 2009 and $1.4 billion in 2010!
In 2010, the Company reported attributable gold and copper production of 5.4 million ounces and 327 million pounds, respectively, at costs applicable to sales of $485 per ounce, and $0.80 per pound, respectively, on a co-product basis.
In 2011, attributable gold production is expected to be approximately 5.1 million to 5.3 million ounces, with attributable copper production of 190 to 220 million pounds. Costs applicable to sales are expected to be between $560 and $590 per ounce due to lower expected production, combined with higher expected costs for energy, labor, and contracted services.
Despite soaring gold and silver prices, as well as their strongest supply/demand fundamentals since the late 1970s (stronger, in my view), valuations for the average junior Precious Metal mining company, on a per Ag/Au basis, are roughly a quarter to a third of what they were at the peak of the TSX-Venture stock exchange in 2007.
Given the title of this rant, as well as the information therein, I’ll leave it to you to draw the conclusion!