It wasn’t
long ago that global gold-mine production had fallen to alarming lows. In
2008 this bellwether supply source was on the heels of a 5-year 13% decline,
offering the markets its lowest output in 12 years. And this precipitous
plunge had left folks scratching their heads considering gold demand was on
the rise and its price was entrenched in a powerful secular bull.
Thankfully this
2008 low would mark a major turning point in global mine production. And a
powerful new uptrend formed that has seen volume rocket to an all-time high
in just three years. According to estimates by the US Geological Survey, in
2011 mine production was up nearly 20%
from 2008, to record volume of 2700 metric tons.
As I explained
in my recent essay on global gold supply,
this last decade’s violent production swing was quite natural. Simply
put, bear/bull exploration cycles take a while to work their way through the
system. In the beginning part of our current bull we saw the aftereffects of
a bear-market exploration cycle. And it wasn’t until 2009 that we
finally started to see the fruits of this bull’s exploration cycle.
With mine
production now on the rise I want to take a closer look at the inner workings
of this major supply source, the source within the source. Where in the world
is the gold coming from? As investors it behooves us to gain an understanding
of some of the forces that are driving industry trends, the same forces that
may govern the decision-making process of a miner looking for gold. Perhaps
this understanding would allow us to make more educated decisions when it
comes to our own investing.
Over the years
I’ve done a tremendous amount of research on all levels of gold stocks,
from tiny single-project explorers to the world’s largest multi-mine
producers. And it is always fascinating to see where the explorers are
looking, where the developers are building, and where the producers are
mining.
While I can
attempt to gain somewhat of a grasp of geographical trends over the course of
my own stock research, there is no better way to wrap my mind around these
trends than by looking at country-level production data. And thanks to said
annual data courtesy of the USGS, we can gain invaluable insights into global
gold-mining trends.
The first thing
you’ll notice in this chart is 2011 estimated production volume,
measured in metric tons, for the world’s top dozen gold producers. And
incredibly this handful of top producers accounts for nearly three-quarters
of gold’s total mined supply.
Since this
production data falls across such a wide spectrum, in order to capture the
trends on a single chart I indexed each country’s tally at 100
beginning in 2001. This indexing allows us to easily visualize production
trends, showing comparable growth or decline rates for these major producers
over this 10-year span. If a country is at 125, its gold production is up 25%
since 2001. If it’s at 75, its production is down 25% since 2001.
In looking at
the raw production data, it shouldn’t be too surprising that many of
the largest countries by land area are on the list of top producers. While
there are certain areas that have much more favorable geology than others,
naturally the countries with large land masses will have a higher chance of
hosting these areas.
Interestingly
about 40% of the world’s land mass is contained within its six largest
countries (in descending order Russia, Canada, China, United States, Brazil,
and Australia). And of these six countries, only Brazil is not among the top
dozen gold producers (though it is close behind).
In looking at
the trends of these mega countries over the course of gold’s bull, it
is apparent that the results vary quite substantially. And provocatively it
is China and Russia that have experienced the biggest growth over this
stretch. China in particular has carved out an incredible growth story, with
its production volume up a staggering 92%
since 2001.
If you recall,
it was huge news when China had taken over the world’s #1 spot in 2007,
dethroning long-time incumbent South Africa. And with consistent
year-over-year growth, China has been going strong ever since. Even though
its government isn’t exactly transparent with the data it reveals to
the world, there is no doubt its growth profile has been spectacular. China
now accounts for 13%+ of the global mined gold supply, and some folks believe
its 355mt is a lowball estimate.
Russia has also
seen impressive production growth, up 31% since 2001. And coming in with
record annual production of 200mt in 2011, it has recently attained the
world’s #4 ranking. Unfortunately the growth we are seeing in Russia,
and China, is not something that stock investors have been able to leverage
much since these countries are hardly hubs for foreign capital investment
into their natural-resources industries.
In both
countries the majority of the mining is performed by either state-owned
companies, semi-state-owned companies, or domestically-based private
companies that are in bed with the government. If foreign mining companies do
try to stick a toe in the pond, they are faced with tremendous geopolitical
risk. And as a result, there aren’t many stocks out there that offer
direct exposure to China and Russia.
The
world’s second-largest gold producer, Australia, has seen a modest 5% bull-to-date
decline by 2011’s tally. And its trend tracks quite well with the global production trend
over this time. Australia’s output consistently faded to 2008, off
about 25% from 2001, and ever since it has been trending higher to where it
is nearly back to par.
Investors have
had great success with Australian mining stocks, especially early on in this
bull. But there have been some issues of late that may put a damper on this
gold powerhouse’s plans to continue growing and attracting investment
capital from the mining companies.
Unfortunately
Australia is really struggling with controlling its mining costs (labor,
energy, lower grades, etc). And to make matters
worse, its government has been incessantly picking on this bread-winning
natural-resources sector. Not only has it been disproportionately jacking up
taxes/royalties, it has put into place policies that have been dissuading
exploration. It will certainly be interesting to see if Australia can
continue to grow production in the years to come. And this will no doubt have
an effect on the flow of investor capital into Australian-centric mining
stocks.
As for the two
North American land giants, their gold-mining trends have been ugly over the
last decade or so. Incredibly both the US and Canada have seen output fall by
nearly a third to 2011’s
respective tallies of 237mt and 110mt. Their mature gold-mining
infrastructures were just decimated by the secular bear that preceded our
current bull.
Up until the
1990s the US and Canada’s gold-mining industries operated like
well-oiled machines, with the miners consistently putting forth sizeable
capital towards exploration and development. Exploration was successful in
renewing and growing the reserves that were being mined. And continual
expansion and new development sustained and even grew production.
But with the
bear laying waste to the price of gold into the 1990s, the US and Canada saw
huge declines in spending. And unfortunately it doesn’t take long for a
pullback in exploration and development capex to
put an industry behind the curve in reserve renewal and next-generation
development.
This lack of
investment in the 1990s spiraled into systematic infrastructure neglect. And
naturally when mines run out of gold, and there is not a sufficient pipeline
of next-generation development, volume can decline quite rapidly. And this is
not the type of situation that can be remedied overnight. Even though
spending started to pick back up in the 2000s, the lagging effects of the
bear were felt well into our current bull.
Considering the
large volume coming out of the US and Canada, their sharp declines took a lot
of gold off the market. And ultimately these North American powerhouses were
two of the biggest culprits of the global mine-production shortfalls that
bottomed in 2008. Thankfully things have finally rounded the corner for these
two major producers. As you can see, their trends are turning upwards.
While the US is
experiencing its own renaissance, thus offering investors more and more
quality options on the stock front, Canada’s gold rush is something to
behold. If you wade through the vast pool of gold stocks, it won’t take
long to realize that the Great White North has become one of the top
destinations for juniors and majors alike. The gold miners have descended
upon Canada in droves, and they’ve been wildly successful in making
huge new discoveries while also reviving past-producing districts that were
shut down due to economics rather than depletion.
Not only does
Canada’s vast expanse have incredibly favorable geology, the miners can
usually go about their business without too much risk on the geopolitical
front. Canada is well-renowned as being mining-friendly. And the proof is in
the pudding with 2011 production up a whopping 21% year-over-year to Canada’s highest output in 5 years.
Investors have a lot of
high-quality options to choose from in Canada.
Outside of
extra-large production from the world’s extra-large countries, size
doesn’t really matter as much for the rest of gold’s top
producers. The world’s 7th through 13th largest countries by size
don’t even make the list. And with such countries as Ghana (82nd
largest) and Papua New Guinea (55th largest) in the top dozen, it is clear
that other factors trump size.
As mentioned
geology plays a key role in the geography of gold production. And no country
may have better geology than South Africa. SA’s incredibly-rich
Witwatersrand Basin has produced over 46k metric tons of gold (about a third
of all the gold mined in the history of the world) from its massive
high-grade vein systems. And as a result this country had long been the
world’s top gold miner, responsible for over two-thirds of global production as recent as 1970 (nearly
1000mt).
But as you can
see from its latest production tally and the directionality of its trend,
South Africa has experienced a huge fall from grace in the global gold-mining
scene. Incredibly SA’s gold production has been lopped in half over the course of this current bull, putting big
decliners US and Canada to shame. At 190mt it has experienced an 80%+ drop in production from 1970
levels, to its lowest output in nearly
a century.
Unfortunately
South Africa has experienced a perfect storm of factors that has doomed its
gold-mining industry. Lower grades, expensive labor, a country-wide power
crisis, major currency issues, and a clueless government are among the many
factors that have led to skyrocketing mining costs and widespread interruptions
and closures of operations. SA is now an industry laughing stock, falling to
#5 in the global rankings.
For these
reasons and more, South Africa is seeing very little outside capital
investment in its gold-mining industry. And this leaves investors with very
few choices outside of SA’s domestically-based majors that have been
taking it on the chin for so many years. Unfortunately these majors and a
handful of other SA-centric publically-traded miners have become the pariahs
of the gold-stock circuit.
Thankfully some
of the aforementioned countries and others have been picking up South
Africa’s slack. And as you can see, Ghana and Mexico have quickly made
names for themselves on the global gold-mining scene. Over the last decade
Ghana has quickly grown to become Africa’s second-largest gold
producer. Its miners have found great success tapping the famous Ashanti gold
belt and newer parallel structures that are being discovered in the southern
part of the country. And this has resulted in a huge upward trend that has
yielded a 47% increase in
production.
This normally
mining-friendly country has long been an African anomaly with its stable
democratically-elected government embracing foreign investment. And investors
have seen some huge gains in some of the elite Ghana-centric gold stocks that
have successfully discovered and developed gold deposits. Unfortunately the
government has gotten a bit greedy, and has recently announced a big tax
increase as part of its 2012 budget. This may turn off some investment and
slow its rate of growth, but the future is still bright within Ghana’s
vastly underexplored gold belts.
Mexico’s
gold-mining growth has literally been off the charts. With 2011 production
coming in at an estimated 85mt, it has seen a whopping 254% increase in output. Long known for its silver (the
world’s top producer in 2011, accounting for nearly 20% of global mined
supply), Mexico has quickly become a mecca for the gold companies.
Mexico’s
large mineral belts have seen artisanal exploration and development for half
a millennium, dating back to the days when the Spaniards sailed ashore. These
historic workings have drawn out a virtual treasure map for modern-day
explorers, resulting in numerous discoveries. And thanks to a mining-friendly
government, these discoveries have translated into major production growth.
Stock investors have a plethora of high-quality options that focus on this
large Latin American country.
Speaking of
Latin America, the lone South American country in the top dozen is Peru. And as
you can see, Peru’s output has been countertrend to the majority of the
top players in recent years. Thanks to major development at some of the large
deposits flanking the Andes, Peru had seen sharp growth out of the gates in
this bull (50%+ by 2005). But for a variety of reasons (pipeline issues and
geopolitics), production has steadily been declining.
Even though
Peru has seen overall 9% production growth since the beginning of this bull, its nearly 30% decline since 2005 has scared off many
investors. And believe it or not, other than the stocks of the majors that
are operating a few large mines, there are only a handful of primary-Peru
stocks available for investment.
As for the
other countries that populate the bottom rung of the top dozen, investors
shouldn’t get too excited over their trends regardless of the
direction. Indonesia’s gold-mining industry is a mess as indicated by
its violent zigzagging across the chart. A big chunk of its production is a
byproduct of major copper mines, and the gold companies trying to tap
Indonesia’s rich deposits are up to their elbows in geopolitical
shenanigans.
Both Uzbekistan
and Papua New Guinea get the majority of their production from just a handful
of large mines. Like Russia and China, Uzbekistan doesn’t welcome
foreign investment. And while there are some options for investors in PNG,
high-quality choices are very limited.
Overall these
global gold-mining trends reveal quite a bit as to where in the world the
mined supply of gold is coming from. And as investors, understanding both the
long-term and interim trends of gold’s major producers can be quite
useful. We can use this snapshot to dig into country-level dynamics, which
will ultimately guide our research and feed our decision-making process.
At Zeal we take
into account such data as global gold-mining trends in our exhaustive
research into gold-mining stocks. And this research feeds our popular reports that profile our favorite stocks in a given sector.
Interestingly in our recent reports that focus on junior gold explorers and
producers, Mexican and Canadian companies dominate the print. We also go
outside the top 12 and profile stocks that focus on up-and-coming countries that
are putting together uptrends of their own.
Ultimately
these reports serve to feed trade recommendations in our acclaimed weekly and monthly newsletters.
And in recent months we’ve been loading up on some of our favorite
junior golds. If you’d like to find out which
ones we are buying and also receive cutting-edge market analysis, subscribe today.
The bottom line
is the gold-mining industry has made impressive strides since its 2008
production low. In the last few years mine output has surged. And in taking a
closer look into this major supply source, we find some fascinating
country-level developments.
Of course the
usual suspects are making noise on the gold-mining scene. But we have seen
quite a shuffle in the ranks in recent years. Fortunately investors who are
attuned to the changes that are afoot can leverage these global gold-mining
trends via high-quality gold stocks.
Scott Wright
Our expert research team looked at the universe of 100 or so junior
producers trading in the US and Canada, and after thorough analysis whittled
this group down to our dozen fundamental favorites that we believe have the
highest probability for success. Each of these stocks is profiled in detail
in our hot-off-the-presses 34-page research report that is now available for purchase on our website. Buy your copy today!
At Zeal we use reports like this to feed trades in our acclaimed weekly and monthly newsletters. And we recently issued new buy recommendations
on several of our favorite junior gold producers. We anticipate that these
stocks will see gains akin to the 51%+ average annualized realized gains that
we’ve had in nearly 600 stock trades recommended in our newsletters
since 2001, and hopefully better. Subscribe today to see our current trades and get truly contrarian
stock-market analysis.
The bottom line is even though gold continues to forge higher, gold
stocks have disconnected from the historically positive leverage that
investors are used to seeing. Not only have the gold stocks not kept pace
with gold, they’ve sold off hard, with the juniors just getting
brutalized.
But so long as gold’s bull remains intact and its fundamentals
compelling, this gold-stock fear will prove totally unjustified. The most
ardent of contrarians realize that gold stocks can’t be held down for
long, and that the carnage we’ve seen, especially in the juniors,
offers huge buying opportunities. Selling has likely reached the point of
exhaustion, so carpe diem before the herd returns.
So how can you profit from this information? We publish an
acclaimed monthly newsletter, Zeal Intelligence, that details exactly what we are doing in terms
of actual stock and options trading based on all the lessons we have learned
in our market research as well as provides in-depth market analysis and
commentary. Please consider joining us each month at … www.zealllc.com/subscribe.htm
Thoughts, comments, or flames? Fire away at scottq@zealllc.com . Depending on the volume of feedback I may
not have time to respond personally, but I will read all messages.
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Zeal Research (www.ZealLLC.com)
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