Peak Gold?Andrey Dashkov, Research Analyst It is also said that the low-hanging fruit of high-grade deposits has all been picked, forcing miners to put lower-grade material into production. You could call it Peak Goldand argue that the peak is already behind us. Lets test that claim and give it some context. One of the ways to look at grades is to compare todays highest-grade gold mines to those from the past. We pulled grade data from the worlds ten highest-grade gold mines for the following chart. However, these results dont provide much insight into the resource sector as a whole, one reason being that the highest-grade mines have vastly different production profiles. This made San Pablo one of the worlds ten highest-grade operations in 2003, but its impact on global gold supply was minimal. In short, the group is too diverse to draw any solid conclusions. We then turned to the worlds top 10 largest operations, a more representative operation, and tallied their grades since 1998. This does indeed look like Peak Gold, in terms of the easier-to-find, higher-grade production having already peaked, but its not as concerning as you might think. As gold prices increased from $302 per ounce at the end of 1998 to the latest price of $1,377, both low-grade areas of existing operations and new projects whose grades were previously unprofitable became potential winners. Expanding existing operations into lower-grade zones near an existing operation is the cheapest way to increase revenue in a rising gold price environment. So many companies did just that. Indeed, the largest gold operationsthe type we included in the above chartwould be thefirstones to drop their gold grades when prices are higher, simply due to the fact that what they lose in grade they can make up in tonnage run through existing processing facilities. Larger size allows lower-grade material to be profitable because of economies of scale. New technologies have helped to make lower-grade deposits economic as well. So, at least until 2011, the conventional wisdom of grade is king was being replaced by size is king. However, production costs have been increasing as welland have continued increasing even as metals prices have retreated in recent years. Rising operating costs and capital misallocations (growth for growths sake, for example) are at least partly to blame for miners underperformance this year. Suddenly, grade seems to be recovering its crown. It remains to be seen whether more high-grade discoveries can actually be made, or whether Peak Gold is actually behind us. The Takeaway Truth is, there is no king. Grade and size, although among the most important variables in the mining business, tell only part of the story. Neither higher grades nor monster size prove profitability by themselvesthemarginthey generate at a given point in time is what matters most. And then what the company does with its income matters, too. Now that the industry has moved on from a period of reckless expansion, we expect investors to become more demanding of the economic characteristics of new projects coming online. Existing mines that processed low-grade ore in a rising gold price environment are now judged by the flexibility they have to cut costs, increase margins, and persevere through gold price fluctuations. Its true that high enough grade can trump all other factors in a mining project, but its the task of a companys management to navigate the changing environment, control operating costs, and oversee the companys growth strategy so that it creates shareholder value. The resource sector has had a sober awakening, and now we see many companies changing their priorities from expansion to profitability, which depends on many parameters in addition to grade. This is a good thing. As for Peak Gold, if that does indeed turn out to be behind us, the big, bulk-tonnage low-grade deposits that are falling out of favor today will become prime assets in the future. Itll either be that or go without. Times may be tough, but the story of the current gold bull cycle isnt done being written. The better companies will survive the downturn and thrive in the next chapter. Identifying these is the ongoing focus of our work. How about a project thats high gradeandbig? We recommended a new producer that has such an asset, and it hasnt been this cheap since its IPO. Find out who it is in the August issue ofCasey International Speculator. Start your risk-free trial with 100% money-back guarantee here. linkwithin_text=Related Articles: 