April 1, 2006
Topic: A Look at the Gold Market From the Perspective of a Geologist
Note: With the benefit of hindsight, we can appreciate this interview more. We know now what Keith Barron must have known as he gave it, that Aurelian was on the verge of announcing one of the most significant exploration discoveries in many years. In this interview, Jim Puplava solicits Dr. Barron’s thoughts on everything from geology and exploration to market psychology and what to expect in the course of the gold bull market.
Jim Puplava: Well, we’re definitely in a bull market. Over the past five years we’ve seen the price of gold go from a low of $255 in April of 2001 to today’s record on Thursday of 588.10. We’ve seen silver prices go from $4.06 to $11.70. And the gold index, the AMEX gold index has gone from a low of 41 to 340. But this bull market is going to be different from previous bull markets in the past. And that’s mainly having to do with supply. To talk about that issue, joining me on the program today is Dr. Keith Barron, a Director of Aurelian Resources.
And Keith, I want to go back to a study that was done a couple of years ago that was done by a geologist by the name of Ralph Bullis, and he took a look…in many ways he reminds me of Matt Simmons, looking at all the world’s producing oil wells, he looked at all the world’s gold deposits. Either they were in production, pre-feasibility or discovery stage. And I wonder if I might start our discussion there, because it was a very telling study.
Keith Barron: Yeah, it certainly was. Actually there’s been a couple of other studies done. There was one by the BHP group too. Basically examining the number of deposits, the number of new discoveries that have been made, well, not new discoveries, but discoveries made over the last fifteen years, what their sizes are and really the consumption levels, the draw down of various deposits as we see in production scenarios today. Production of the major companies is pretty healthy and if you want to replace those deposits, a lot of people out there in the investing community don’t realize that a mine is what we call a “wasting asset”. Meaning that, when you start mining it from day one, eventually it’s going to run out. And these things always do run out. Some of them carry on for a hundred years like Homestake, but the typical life for a gold mine is about eight years. And that’s pretty much the industry norm.
And there really haven’t been a lot of big, monster deposits found in the last five, six years. And, you know, some of the huge ones that we had back in the early 90s, like the Pierina deposit which ended up being 12 million ounces, Yanacocha, which is huge, that’s like, I think that’s well over 10, maybe getting up to 15 million ounces, maybe even larger than that, they simply haven’t been found in the last five, six years. I think we’ve had three discoveries that have been in the 5 million ounce realm. And that’s it. A lot of that’s got to do with the fact that there was very, very little exploration activity out there when the gold price was down in the dumps, in the $250-260 range, and it really had to spike up above $350, $375, $400 to start to jump-start that cycle again.
JP: I want to come to that because we’ve spent a lot of money in exploration over the last five years but despite the amount of money that’s been spent on exploration, we haven’t had these major discoveries. In other words we haven’t found a North Sea or a
KB: Well that’s certainly one component. And part of that access is a profusion of new national parks and new wildlife sanctuaries and also jurisdictions in the world where the chances are if you make a discovery you’re going to simply come up against a lawsuit by a number of environmental groups. But all that being said, I think when this cycle restarted, and it really did start to take off around 2003, we saw a lot of junior companies simply going out there and picking up old discoveries, some really rather tired things that have been kicked around for a long time because they could quickly and easily do it and make some coin in the marketplace.
It does take a number of years of sustained exploration activity to work these things up and to find new deposits. And I think we’re starting to see things bear fruit now. But all that being said, I do think that as far as the industry goes, the low-hanging fruit is long gone. I think that a lot of the easy parts of the world have been walked over, they’ve been looked at numerous times it’s getting more and more expensive to find these deposits. Companies have to go deeper. They have to use sophisticated techniques like geophysics and geochemistry to find these things. And it’s simply not a case of walking over the ground and stumbling over a quartz vein full of gold and yelling “
So I think that as we go forward and we look towards the future in the gold mining and silver mining industries, I think the companies are going to have to start to get a little more realistic about what their expectations are. And in the latter couple of years we’ve seen a lot of the major companies, a lot of the senior producers up their, I guess, qualifications for a deposit that they want to get interested in. And when I started in this business back in the early 80s, companies were looking at one million ounces. Soon thereafter it became two and then it went to three. And for a lot of them now, the threshold’s at five. Five million ounces or they’re not going to play. Well, five million ounces…those types of deposits are scarce as hen’s teeth [laughs]. And certainly the record of discovery over the last five, six years is bearing that out.
So I really do think that the companies are going to have to set their sights lower and start being a little more realistic and even start looking at deposits that are one million ounces or perhaps even smaller. You know, quite often the companies are fixated on the number of ounces in the ground, but you have to think about quality ounces, too. And there are a lot of deposits out there that are quite lucrative that are only a million ounces. They’re high grade things, they may not have a long duration mine life, but nevertheless you can make a nice tidy sum of money at them. And I think really that’s where the future of the industry’s headed.
JP: You know, you’ve been in this industry for twenty-five years. You’ve worked at the majors such as Goldfields. And you just made a comment that when you were in the industry, a one million ounce deposit or one million ounces of production, I mean, if you take a look at Newmont’s production going back to 1988, it was under a million ounces a year.
KB: Um huh. Yeah, indeed. Well, you know, the way that it works in the market place these days, if you’re…the larger you are, the more money you attract from the funds and that’s one reason why these companies have very much been engaged in mergers and acquisitions and gobbling each other up. Because size in the resource sector really, really does matter. So, the kingpins, the Newmonts and the Barricks of the world are the ones who are going to attract the attention from the investment bankers. And not so much the smaller players. So that’s one reason why…you know, to significantly grow your ounces on a percentage basis, you have to go out and acquire these large reserves.
So, really what we’ve seen over the last couple of years now has been a shift away from actual exploration, to acquisition. And companies have gone out and they’ve started to gobble each other. And we’ve seen that, we saw Homestake go. Just very recently we saw Placer now go. And I think this is a trend that’s going to continue, if these senior producers continue to be fixated on having to grow their resource base by huge increments.
JP: I want to contrast today’s gold market with what went on in let’s say the late 60s and the 70s, because during that period of time there was no shortage of supply, the
KB: Well, it’s really quite interesting. There’s a lot of difference now in the market place from what we saw back in those days. And a lot of it has got to do with the fact that the price of gold is quoted in US dollars. So if you’re a producer in South Africa, for instance, you have to pay your costs, your labor costs, in Rand and the Rand is appreciating against the US dollar, meaning it’s going up in US dollar terms, and the gold price is not going up in US dollar terms as fast, then you’re going to end up being a loser. And some of the companies working in foreign jurisdictions like
I think that there’s some very interesting stuff going on now, though. And I think a real big trigger as to what’s happening in the market place has been this latest…this recent acquisition of Virginia Gold by Goldcorp. And I don’t know if you’re familiar with this Jim, I’m sure that some of your listeners are, but this is a real significant, maybe even a bellwether event, because Virginia Gold had a deposit in
[Note: On September 12, 2006, Aurelian Resources appointed Andre Gaumond, President and CEO of Virginia Gold to their Board of Directors.]
Now there was a lot of rumor on the street, a lot of very good drill holes, a lot of very good results that came out and people were thinking it looked like maybe four million ounces or so. And it got snapped up before there was actually a number put to it. And I think this is very significant. This is telling us that some people in the industry realize the problem here, realize that these things, these big deposits are scarce as hen’s teeth and if they get wind that a little company is on to one of them, they’re going to get snapped up early. I think this is really, really interesting.
JP: And that’s the surprising thing. I get reports, I take a look at gold production, Keith, I take a look at all the majors, what’s happening to their production. I’m taking a look at all the rising costs, declining production, declining profit margins and then I’m also looking at, just as I am in the oil industry, you look at replacement of reserves and how many of these large majors are replacing their reserves every year? They’re not.
KB: They’re not at all, in fact they’re reserve base, their profile is declining for most of them. There’s not just currency considerations, there are huge costs, especially due to fuel and we saw the gold price spike up today but we also saw the oil price spiking up today. So, you know for a producer, it’s expensive to produce. Diesel, gasoline, lubricants, rubber tires which are made out of petrochemicals. All of this stuff is getting very, very expensive and it adds to the cost of production.
JP: You know another aspect to this that I see is the human element. And that is, a shortage of qualified people: geologists, I mean, who wanted to go in the gold-mining industry or the mining industry in the 90s? If you were studying, you wanted to become a programmer, get in to technology or go on Wall Street. How many people wanted to go dig for oil or for that matter, copper or gold?
KB: Well, I did, but I was one of the few [laughs]. But, I taught in the university for a little while, and I remember back in the late 80’s there were very few students around. There were lots of students being openly courted by…to go in to environmental science and things like that. Geology just wasn’t sexy enough. And there’s been a lot of comment in the last year in the industry that you know, 2010, 2015 we’re going to have real problems in the industry because we’re just simply not going to have the personnel there.
JP: If you were advising somebody on a career, would you tell them to go in this industry, today? Because the very same things you’re saying about the mining industry people in the oil industry are echoing the same sentiments.
KB: Well, yes, that’s true. And both industries, as you know, are very cyclical. And it’s not for everyone’s palate, but they also can be very lucrative and very exciting. I just love it. I think it’s great!
JP: Keith I want to move on to another element about this bull market, because everybody’s talking about central banks are tightening, but I looked at the money supply globally, we’re a world run on fiat currencies. European money supply growth is over 8% and at the least the last time they reported M-3 growth here in the
KB: Well, I think that’s certainly the case and gold and silver for thousands of years have been regarded as a safe haven. And we’ve seen many cases in history where countries have inflated their money supply right away to nothing and the ones who had gold and silver hard assets were the ones who ended up surviving the crisis very, very well. In fact, some of them did extremely well. You know during the Great Depression in the
I think, you know the sentiment in the
You know, the
JP: I think that explains why we’re seeing gold break out against most major currencies. Keith, I want to come back to gold exploration, because you’re a geologist and that’s your expertise. Are there places in the world today that maybe we don’t have access to that we know there’s gold or silver, but we just don’t have access to because of political reasons or environmental reasons. In other words are there spots out there?
KB: Oh, I’d say there’s lots of spots. I’d say that there’s lots of places, say in the
JP: [laughing] I wonder why.
KB: I wonder why, yeah, ha ha. Places with extreme political risk. You know, as time goes by, more and more of these frontier areas are going…they’re being investigated, it’s getting harder and harder to find places that haven’t been touched before.
JP: Another aspect to that is I’ve been told today that realistically, where, let’s say if you were to go back two decades ago, it might have taken five years or maybe even less from the time of discovery to the time of production. I am told by people in the industry today that you’re even looking at closer to ten years today. So, even if we were to go out and discover a North Slope or a
KB: Yeah, I think that’s certainly the case. You know, this is not the 1960s, there’s a high level of environmental consciousness out there, not just from the environmental groups, I’m talking about from the actual companies and the people who perform the work, such as myself. We’re all aware of having to protect the environment and do things in a responsible manner and this kind of stuff takes time.
Also, in the late 90s, we did live through a very large fraud that was perpetrated in Indonesia and now there have been all kinds of safeguards put in place on various countries, Australia, Britain, Canada, the US, their mining industries are all much more heavily regulated. And in terms of going through the various stages of exploration and reporting and raising money and doing that kind of stuff, companies have to be a lot more careful, they have to be a lot more professional in their work, they have to record things a lot better, and keep better records and all that stuff takes time, too.
Like for instance, talking in terms of how long it takes to get a big gold mine up and running, Barrick has a fabulous deposit called Pascua Lama which is right on the border between Argentina and Chile. And to get at it, they’re going to have to move a glacier. Now this has been a point of contention with several different groups, I understand that in the engineering sense it’s not a huge thing that has to be overcome. But obviously this kind of thing has to be done with some sensitivity and it needs comment and discussion from the various parties who are stakeholders in this kind of stuff. And all this does take time. So I think it’s going to take a number of years before we see that one getting up and into production, even though it’s been known for quite some time now.
JP: You know, another aspect about this market, we’ve talked about the majors not being able to replace their reserves, we’ve talked about that there just aren’t that many five million ounce plus gold deposits out there. Yet, you have people like for example, you have the head of Goldfields talking about we’re revising our acquisition targets and we’re looking at five-million ounce properties plus. Does he see something or know something that none of us are aware of?
KB: I doubt it. He might be taking a little bit of flack from the operations in
JP: Let’s take a look at the exploration side. Let’s say I’m running a gold fund, a gold account and I want to send you out on a project to look at it before I finance it or before I invest in it. Why don’t you take us through, from your perspective, what do you look for, as a geologist, if you’re doing due diligence on a property?
KB: Well, I would say, one of the most important things that I always look at first, are the people who are involved. And I’m not just talking about the management who are in the head office, I’m talking about people on the ground. I like companies that have their own personnel, rather than employing contractors or contracting firms. Because, quite often people who are on the site, if they work for the company, they’re probably getting rewarded with some stock options, they have a vested interest in making it work and they all work a little bit harder, I think, than maybe disinterested contractors would. So I think that’s important. It’s very important to look into their backgrounds and at their experience and see where they’ve been and how many years they’ve spent in the business.
And then, looking at the project itself, there’s always…location is an extremely important thing, the jurisdiction where it is, political jurisdiction, infrastructure, how close is it to sources of power, roads, air strips, things like that. What’s the availability of skilled personnel in the country? Can you find a source of workers for the mine nearby or do you have to bring them in from another country? That’s very important. I know there are some companies working in
So that’s a real important consideration. A lot of people e-mail me and they ask me about political risk and they say “You know, we’d be a lot happier if you had a project that was in the
JP: Keith, what are you going to see if you were going out to view a project, you just talked about the company having its own personnel, environmental restrictions, things of that nature, but let’s that I’m an analyst or a newsletter writer, I’m not a geologist, I’m going out to a project. What are thing you’re going to pick up on that perhaps, I wouldn’t see?
KB: Well, most of the analysts that I run into actually do have a geological background. They might have put a couple of years in to the business before going in to the banking side or the investment side. So a lot of these guys certainly know the buzzwords and the right questions to ask. I guess there are a number of things. I know certainly I can go through a press release, there are often things that are not implicitly said there are sometimes errors of omission [laughs] in press releases.
JP: What we don’t tell you that you don’t need to know, huh?
KB: That’s right. And that’s a…well, here’s a for instance and this is something that I ran into back in the late 90s. It was a company that had a copper deposit in
Now that’s very, very important and very significant for some of us in the business because we know that’s about the limit that you can go on an open-pit mine. And there’s not going to be any company in the world that’s going to move 450 metres of waste rock which has no value, to get at the goodie zone. So really, that property was quite valueless. And there were a bunch of guys who were bagging the market on it. So, you know, we call these things sins of omission, and they’re out there. Certainly the lay person, if you read enough stuff and you make yourself familiar with the business, you can pick these things up. You do not have to be a university trained professional to pick up on this. Really a lot of companies have cleaned up their acts since the mid 90s, early 90s, there’s not much of that kind of stuff that goes on, but every now and then I do see things like that.
JP: You know, one aspect that has struck me, Keith, is I believe in this bull market that there the juniors are going to be the place to be. I mean, that’s where you’re going to see the growth. Whether it’s a junior producer that can go from, I don’t know, 25, 50,000 ounces of production to maybe a hundred, two hundred. Or maybe a 200,000 ounce producer that goes to 500. What are the key things that you would be looking at if you were investing your own money in a junior.
KB: Well, I think one very important thing is blue sky. There are a number of projects out there that have been shopped around numerous times, have had lots and lots of exploration done on them and really they’re at a stage where there’s not much blue sky potential in them. Meaning there’s not a lot of expectation that they’re going to come up with something that’s going to be huge and big and new and not seen before.
Let me just back track a little bit, let me back track here. A company, XYZ Company goes in to
JP: What about development plays, where you take a company that perhaps is drilling out and developing a piece of a property, they have a sizable ore deposit. They also have a large enough land package so they’ve got other discoveries that they’ve made on the horizon. In your mind, what make a company attractive for a takeover?
KB: Well the scenario you just discussed was exactly what Virginia Gold was when it got taken out. It was a company that had been very successful finding gold and base metals in various places. And they had one exceptional project that looked like it was going to be a multi-million ounce producer and that’s why it got scooped up. So, a great scenario, great package of land, lots and lots of blue sky and it’s an area that Goldcorp can be looking at for years. Or, you know, Goldcorp could choose to, you know, get something to a certain stage and vend it off or vend an interest to somebody else and develop it with partners. It gives companies a lot of freedom of choice and a lot of ways to move.
JP: Keith what about scenarios where you have a deposit that is a long-life deposit or that is a sizable one, but it’s also in a more politically stable area of the world? For example, I would be somewhat reluctant to go into
KB: Well, certainly those are extremely prospective areas. Parts of
But there are other jurisdictions in the world, right now I’m involved in
JP: Keith, you’ve been in this business, what, twenty-five, thirty years now?
KB: Um-huh, twenty-five.
JP: What would you say is the most important thing that you’ve learned from a geologist’s point of view?
KB: Oh, boy! [laughs] There’s so many different things…
JP: Top of the list…
KB: Always keep your mind open to new things. We’ve seen various things…since I started in this business, there’s been a lot of discoveries of different commodities made in parts of the world that we thought didn’t have any potential. Like for instance, the diamond deposits found in the
So, like for instance, right now there are a lot of people interested in uranium deposits. There has been no exploration done, really, on uranium from really the early 80s. And there’s a lot of new concepts and new techniques, there’s something called in situ leach that was never used, back in the 80’s, that’s revolutionizing the uranium extraction industry. And we could very much see similar sorts of things shaping up at some point for the gold and silver industries. Who knows what’s on the horizon?
JP: Alright, that’s from a geological point of view. What about from an investment point of view?
KB: Well I think that this is a time that we won’t see for many generations to come. I think that the stars have aligned themselves to such an extent…I really do think that the huge gains that were made in the gold and silver markets back in ’73 and then again in ’79, ’80…all of that is going to be surpassed. I think there are a lot of people out there, a lot of investors now who are much more comfortable with investing money in the stock market, there are more players in the stock market than ever before, a higher proportion of the population. And because really due to globalization and the Internet and technology, you’re able to…for instance, I can invest in South African gold companies, I can invest in companies in
I think what we could see here, and I’ve talked about this on my own web site a couple of times, I think that what we could see, if this market really starts to break out, you could see something that resembles the Dot.Com boom in the gold and silver market. Right now there’s a very, very small percentage of the investing public that have caught on to the massive rises and gains in the gold and silver market and you know, it’s not being broadcast by BubbleVision on the TV, but it is getting around by word of mouth and certainly by your program, Jim. And the word’s getting around and it’s going to spread like wildfire. And when this thing really starts to take off, I think you’re going to see some massive gains in the market place.
JP: You know I couldn’t agree more. What really surprises me, Keith, if you take the AMEX gold index, which bottomed in the first part of 2001 at 41, on the day you and I are talking on Thursday, the AMEX gold index hit 340.81. That’s an increase of 731%. In the last five years. Now imagine what they would be doing on CNBC if tech stocks were up 731…I mean, Cramer would be doing headstands.
KB: He certainly would! He’d be shouting even louder than usual. It amazes me that this stuff doesn’t happen. But, unfortunately it’s going to have to keep moving through cocktail chatter and people you meet on the bus and listening to great programs like yours and things like that and that’s how the word’s going to have to get out, because the mainstream media doesn’t seem to want to carry this stuff. In time they will. In time it’s going to be so big and so hot that it’s going to be impossible to ignore. And then they’re all going to start getting on the bandwagon. In fact, they’re going to start fighting for position [laughs] to report these various things. I really do think that’s going to happen. I was around in ’79 and ’80 when gold went up to eight hundred bucks and silver took out fifty bucks. I just think to myself “Good Lord, what would happen if you had the Internet around, back in those days?” And I think that kind of stuff is headed our way. I think you’re going to see some of the valuations of these companies just take off.
JP: You know, the thing that strikes me about that, one of the turning points in my career, was watching what happened to the stock market from 1982 to 1995, you made good money if you were investing in the stock market. But the final one third, when the public came in, 95% of the money that came in to mutual funds came in from ’95 to 2000. And what I can’t help but think about, Keith, is look how small…I mean, we could take and roll up all the world’s gold mining companies and they would be less than the value of General Electric or Microsoft. So imagine what happens when we get to Stage Three in this bull market?
KB: Yeah. And a lot of people have talked about that, that’s what they call in markets the manic stage. And it’s going to get there. And that’s the stage when you’re going to be having a sandwich during your lunch hour and you’re going to be overhearing people talking about the gold price. You’ll hear it talked about on the subway, you’ll hear about it in the elevator, going up to your office. And this is what’s going to happen. And I think it’s coming. There’s just so many signs out there. Just in the last couple of weeks we’ve seen what’s happened with the restating of results that’s coming from GM and you know, I look at that situation and I think, boy, you know those poor people who are employed by GM, what’s going to happen to them? Somebody’s going to have to come in and rescue their pensions or something and it’s going to be done with public money. Mr. Bernanke is going to open the pockets and spread his largesse and the M-3 money supply, even though it’s not quoted anymore, is just going to burgeon. And certainly everyone knows that that’s going to happen. I think that the
JP: Yeah, one would have thought, doubling of gold prices, more than doubling of silver, gold stocks up 730% would capture people’s attention, but I don’t think, maybe we’re too early yet, but Keith, as we close, why don’t you tell people about your website. You write pieces, some of it published on our web site and tell people about the companies you work with.
KB: Well, okay, I have my own web site, it’s called Straight Talk on Mining.com. I’ve got a number of different pieces on there that people can download for free and I just write it when I get the chance. It’s a completely free site and I write about general things that interest me, mining, there’s a little bit of geology on there, I try not to make it too tough for the lay person to understand. So I do that just as a hobby. I’m a Director of Aurelian Resources which is a gold and copper exploration company working in
And I’ve also been working on a uranium play, in a different company, in
JP: Well I couldn’t agree more. Well, Keith, I want to thank you for joining us on the Financial Sense Newshour and sharing your knowledge with our listeners. I want to wish you all the best and I hope you’ll come back and talk to us.
KB: Well it’s certainly been my pleasure Jim and I’d be more than happy to come back any time.
Interview Audio: http://www.financialsense.com/Experts/2006/Barron.html
Dr. Keith Barron’s FSO Guest Editorials: http://www.financialsense.com/editorials/barron/main.htm