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 five-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 2,700 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 No. 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 No. 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 five 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
seventh 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,
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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
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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. Thanks! Copyright 2000 - 2005 Zeal Research (www.ZealLLC.com)
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