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Global Gold-Mining TrendsScott Wright Gold mineralization knows no borders. This most precious of metals can be found within the highest mountains, densest jungles, hottest deserts, and deepest bowels of the underworld. But since all land is outlined by borders, gold mining’s global affair is bound by country-level dynamics. And with the mined supply trending down, these dynamics have become increasingly important. Since the beginning of gold’s secular bull in 2001, global production is down well over six million ounces annually. And in an environment where demand is on the rise, this has become a huge structural problem. Mining companies have faced challenge after challenge, and are having a heck of a time supplying the markets. I recently took a comprehensive look at gold supply, from an overall global production perspective, detailing this alarming decline. I’ve also written on gold-mining challenges in recent years, highlighting a growing list of issues that hinder mine production. But in this essay I want to dig even deeper, and take a look at gold-mining trends on an individual-country level. And thanks to data from the US Geological Survey, we are indeed able to parse out annual global gold production to an individual-country level. Viewing this data over time we can easily see trends unfolding for the major gold-producing nations. And after looking at these trends we can then try to understand the dynamics that are feeding up, down, or flat directionality. One of the best ways to wrap my mind around this kind of analysis is to paint a visual picture. And in the chart below we can see the trends of the current top dozen (responsible for over 75% of global mine production) gold-producing countries over the course of this bull. For reference I’ve also included raw production data, each country’s 2009 volume measured in metric tons.
Since this raw production data falls across such a wide spectrum, I indexed each country’s annual production at 100 beginning in 2001. This allows us to uniformly compare each country’s annual growth/reduction rate over this 8-year span. If a country is at 150, its gold production is up 50% since 2001. If it’s at 75, its gold production is down 25% since 2001. Before I touch on the actual trends, I’d like to scope general country-level dynamics relating to size, geology, and geopolitics. On the size front, it is natural to assume that since gold is found all over the world the larger countries would be the biggest producers. And for the most part, this is an accurate assumption with five of the world’s six largest countries near the top of this list. In descending order Russia, Canada, China, USA, Brazil, and Australia are by far the largest countries measured by total area (42% of the world’s land mass). Only Brazil is not part of the top 12, but it is close behind with 50 metric tons of gold production in 2009 (13th). Total area indeed translates to volume for these elite few. But outside of the top six, size doesn’t paint an accurate picture of the next level of major gold producers. And this is where geology can come into play. South Africa (25th largest in area), Peru (20th), Indonesia (16th), Ghana (81st), Uzbekistan (56th), Papua New Guinea (54th), and Mexico (15th) are the next largest gold producers, but don’t come close to falling in line as the next largest countries by area. Interestingly the next six largest countries by total area (India, Argentina, Kazakhstan, Sudan, Algeria, and the DRC) combine for only about 78mt of annual gold production, with Argentina responsible for well over half of this. Yet the countries of Ghana, Uzbekistan, and Papua New Guinea, with a combined area well less than that of the state of Alaska, produce 235mt (10% of global supply) annually. Then we have South Africa, the world’s fourth-largest gold producer yet 25th largest country (7% the size of Russia). Up until 2006 South Africa had long been ranked as the world’s largest gold producer, and as recently as 40 years ago it was responsible for over two-thirds of the world’s supply. South Africa, Ghana, Uzbekistan, and PNG are examples of countries that, while not robust in size, are found to be very robust in economical gold deposits. Traces of gold can be found nearly anywhere, but only certain parts of the earth’s crust have geological structures that are amenable to profitable mining. And within the borders of these countries and a handful of others, the geology is top-shelf. Regardless of size and geology, the true potential of any country’s gold mineralization can only be realized if the geopolitics are favorable. All miners must weigh geopolitical risks when exploring for and developing gold deposits. If a region, province, state, and/or country is not mining-friendly, building a gold mine could be an exercise in futility. Some countries flat-out don’t allow mining in certain areas or have bans on certain methods of extraction and/or processing. Some countries do allow mining, but still may not be mining-friendly if the regulatory environment is too authoritarian. If procuring permits and/or gaining environmental approval is too cumbersome, the economics are out the door. And the geopolitical risks aren’t gone once a mine is built. We’ve seen government meddling destroy many countries’ mining industries. When commodities prices run higher, some governments get too greedy and impose impractical levies on gold production. They’ll raise taxes, increase royalties, and sometimes flat-out nationalize part or all of a mine’s ownership. This is of course bad for business and ultimately diminishes future investment in that country. There are plenty of examples of countries that have greatly limited their production potential as a result of overpowering government, and Venezuela is a poster child. Venezuela’s Marxist-style government manages its natural-resources sectors with an iron fist. Even though there are known gold deposits of gargantuan size and huge potential for discovery within its borders, Venezuela’s Machiavellian history of nationalizing foreign-owned operations and assets has turned away foreign investment in its mining industry. On the other side of the coin is government instability. And Venezuela’s neighbor Colombia offers a fine example. Due to the central government’s inability to protect businesses from violent rebels and drug cartels, the miners had long avoided Colombia. And this is unfortunate since this country is host to incredibly robust systems of gold mineralization that are ripe for the picking. Like Venezuela, Colombia easily has the potential to be a top-12 gold producer. But as a result of high geopolitical risk, it was underexplored and underdeveloped. But unlike Venezuela, things are finally looking up for Colombia. Now host to one of the world’s top emerging economies, Colombia’s newly-stable government has purged the riffraff. And this has resulted in a flood of foreign investment that I believe will develop this country into a major gold producer. In general size, geology, geopolitics, and other factors combine to set the direction for the global gold-mining trends we see above. And we are seeing some fascinating action from the world’s major gold producers. The first thing that should stick out in this chart is the production declines. Not only is production down for over half of these countries, it is down big for most of the heavyweights, with China the exception. But interestingly China hasn’t been the exception for very long. Back in 2001 China was far from gold’s bellwether producer. In fact, as the world’s fourth-largest producer it was a full 100mt behind number three, at 185mt. South Africa (395mt), the United States (335mt), and Australia (285mt) had long been the big-three, and in 2001 combined for 40% of the global mined gold supply. These countries have since taken huge haircuts, combining for only about 27% just 8 years later. Down 23% since 2001, Australia has seen the least of the damage. USA is next, producing over a third less gold than 8 years prior. And South African production has fallen off a cliff, down by nearly half over this span. These colossal production declines amount to 375mt (12m ounces) annually and tell of huge structural problems in these countries’ gold-mining industries. Geology is of course a major factor. All three of these countries are no longer picking the low-hanging fruit that once existed. The near-surface, higher-grade, incomplex ore is simply not as abundant as it used to be. Many of the larger deposits have been depleted, and thanks to an exploration lull in the 1990s new deposits have not been discovered and developed at a fast-enough pace to replace the older ones. Geopolitics is also a factor, especially in South Africa. Not only has SA had to deal with currency issues and major power shortages, its Communist-style government has wreaked havoc on what has long been its most important industry. Also with sharp declines are Indonesia and Canada. Much like the other decliners, not enough new mines were being built to replace the depleting ones. Unfavorable geology within existing mining districts and lack of grassroots exploration in the bear years are again the culprits. And since most of Indonesia’s gold is a byproduct of its large copper mines, its overall production took an additional hit with byproduct production way down over this span. On the upside we see huge increases in gold production from Mexico and China, with notable increases from Peru, Ghana, and Russia. Measured by volume, China has quickly become a juggernaut in the gold-mining industry. In just 8 years it has increased its annual production by a staggering 115mt (3.7m ounces) to become the world’s largest gold producer. And provocatively one of the major catalysts to China’s growth spurt was geopolitical in nature. China finally realized it couldn’t satiate its ravenous appetite for natural resources on its own, and recognized its need for the skills, expertise, and technology to economically extract its minerals. It thus enacted its 1997 Mineral Resource Law, opening the doors to the foreign mining companies that possessed these traits. And as is apparent, this released the mining floodgates. Russia’s steady growth has solidified this country as a major gold producer, but it has not even come close to unlocking its true potential. As the largest country in the world measured by total area by far, Russia is naturally going to host large pockets of favorable geology within its borders. Unfortunately its geopolitical situation is quite inhibiting as I’ll highlight in a bit. Peru, the next-largest producer exhibiting growth, has also opened its gold-mining floodgates. With favorable geology and generally-friendly mining laws, gold production in this country has increased four-fold since the mid-1990s. Mining companies are just getting a taste of the rich gold mineralization held high in the Peruvian Andes. Next by volume is Ghana, one of only a handful of African countries with a stable democratically-elected government. And this government understands the economic importance of foreign investment and expertise in developing the rich gold belts within its borders. Lastly is Mexico, and with its trifecta of size, geology, and favorable geopolitics (the current drug violence is very isolated), it is the fastest-growing gold producer on the planet. Even though its flagship Sierra Madre precious-metals belt has been mined since the 16th century, today’s miners are realizing they’ve only been scratching the surface of its vast mineral wealth. Mexico is the world’s second-largest silver producer, and is quickly climbing the ranks of major gold producers. Overall these country-level bull-to-date production trends are intriguing, but are they expected to continue in their prevailing directions going forward? Yes, and no. First, investors must understand that gold mining is much harder today than it was 100, 50, 20, and even 10 years ago. With large highly-concentrated surface outcrops a lot rarer, it is getting more difficult to find gold. Combine this with higher-than-ever geopolitical risks thanks to environmentalism and governmental greed, and you can understand why this business is not for the faint of heart. But with the price of gold trending higher, the miners will find a way to bring gold to market. They’ll have to be more creative and perhaps grow their appetites for risk, but they will succeed. And there are two major factors that will allow this to happen. First, the current exploration cycle will soon yield results. And second, these higher prices will make the miners seriously consider history in their future plans. On exploration cycles, we continue to see how bears, even long-passed, affect subsequent bulls. In the last gold bear, rapidly falling prices gave miners little incentive to spend money on exploration. And in the 1990s exploration fell well short of where it needed to be to replace reserves and maintain infrastructure. Years of neglect take years of plenty to remedy. And in the coming years we should finally start seeing the fruits of the last decade or so of exploration. As for history, many miners are finding great success looking for gold where it is already known to exist. Interestingly many of the world’s finest historic gold-mining districts ceased operating due to economics, not depletion. And now with gold prices much higher, many of these once-uneconomical resources have positive economics. Because of this many of the world’s historic gold districts are currently undergoing revivals, with renewed exploration and production activity. And this is a win-win for the miners. Not only can they bypass the tedious and expensive process of looking for the gold, in many cases these old districts come with serviceable infrastructure, which greatly reduces development costs. As for specific country-level directionality, I’d like to tie this in with some work I did earlier this year analyzing junior gold exploration. In preparation for a series of reports on our favorite early-stage, advanced-stage, and producing junior gold stocks, I had at my fingertips the locations of where these juniors are spinning their drills and developing their mines. And I found that the vast majority are focusing their efforts in North America, with over 70% of all juniors owning projects on this continent. USA, Canada, and Mexico not only have favorable geology and low geopolitical risk, these countries are littered with past-producing mining districts that still have a lot of gold remaining. Juniors and even the larger miners have really been focusing on development in these countries, which is why I believe we will soon see the bleeding stop in USA and Canada, and for Mexico to continue its growth. I would also expect to see continued growth in Peru and many of the low-geopolitical-risk South American countries outside of the top-12. Brazil, Argentina, and Chile in particular are all knocking on the door. These countries hold huge untapped gold-anomalous structures, along with many historic districts that are still known to hold gold. The major mining companies are currently building some big mines in South America, and nearly one in five juniors owns projects on this continent. Of the top 12 countries that come with elevated geopolitical risk, the only certainty is that they will continue to produce well beneath their potential. As for their trends, they will vary in future direction on a case-by-case basis. China, even with its friendlier mining laws, still holds a lot of risk for foreign mining companies. This risk has limited the influx of foreigners, but enough are pouring in to build mines and train up the domestic companies at a pace where ongoing production growth is still underway. As mentioned South Africa is still dealing with major geopolitical issues. It is also doing a terrible job renewing the super-high-grade reserves that once made it so dominant. With geopolitics and geology out of favor, experts anticipate its production decline to continue. Australia is a tough call right now. Since its production peak of 315mt in 1997, exploration and development has really diminished. As a result, lack of discovery and infrastructure upgrades are taking their tolls. And to make matters worse, this country is now dealing with a major threat on the taxation front. This uncertainty of course thwarts any zeal for exploration. A couple of big new mines will keep production steady, but I don’t see Australia taking a sharp turn to the upside anytime soon. Russia and Uzbekistan have huge potential, but geopolitics will continue to stand in the way of any material growth from their current levels. Russia’s quirky mining laws make it very difficult for foreign companies to profitably operate a gold mine. With gold considered a strategic metal, its laws outline resource thresholds that in most cases disallow foreigners to own a majority stake in a given deposit and/or operation. This is of course a big turn-off for foreign investment. Uzbekistan’s geopolitical climate is even more hostile than Russia’s, which is unfortunate considering the rich gold mineralization within its borders. Nationalized mining will always have shortcomings on the technical and personnel fronts, which really limits discovery, innovation, operational efficiency, and ultimately profitability. If these countries only understood the economic benefits of allowing independent profit-driven mining companies to explore and develop, I doubt there would be such extreme supply issues. The trending for Indonesia and Papua New Guinea is primarily dependent on the activities of their small handful of large miners. Each of these island nations’ economies is heavily dependent on the tax revenues from their massive gold and copper mines. Which makes me surprised that we aren’t seeing these countries encourage more foreign investment in order to take advantage of the higher prices. PNG is making better strides recently in promoting its mineral wealth, but both countries need to hit the campaign trail if their trends are to move in the right direction. Lastly is Ghana, Africa’s second-largest and fastest-growing gold producer. In the last couple decades Ghana has enacted mining code that has greatly encouraged foreign investment. And the riches held in the prolific Ashanti gold belt have attracted miners in droves. Ghana is still a hot spot, and several mines in the pipeline should continue to boost growth in the coming years. And thankfully other African nations are taking note of Ghana’s success. Investors should keep a close eye on the activities in up-and-coming Mauritania and Burkina Faso. So as investors, how do we play these global gold-mining trends? First, we should familiarize ourselves with the country-level dynamics of where we want to invest. Understanding what’s gone into a production trend, and the probable direction it will take in the future, can help guide the decision-making process. Specific knowledge of history, geology, and geopolitical risk will radically improve the odds of success. At Zeal we take into account trends such as these when picking stocks to profile in our reports and trade in our newsletters. For example we recognized South Africa’s shortcomings many years ago, and thus shied away from gold stocks operating in this region. These stocks have of course been major underperformers relative to their peers. We also recognized the opportunities in Mexico, Ghana, Peru, and even China as they’ve taken market share, successfully profiling and/or trading many of the best gold stocks operating within their borders. Our subscribers will attest to the success we’ve had trading this gold bull since its beginnings. And much of this success is driven by quality research and analysis, which gives us a much better understanding of the intricacies of the gold-stock sector. If you crave cutting-edge market analysis and are interested in where in the world we are currently trading, subscribe to one of our acclaimed newsletters today. The bottom line is gold mineralization indeed knows no borders, but gold production does. Since only a handful of the world’s 200+ countries are responsible for the majority of mined supply, it is important to understand the dynamics that have driven and will drive their production trends. And it is fascinating to see what goes into global gold-mining trends on a country-to-country basis. Size, geology, and geopolitics are among the many factors that ultimately drive production volume. And as investors it is our job to distill how these factors, and thus trends, can mold our trades. ### Dec 3, 2010
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