Why Invest in Exploration Right Now?

Over the last 13-years ten of the world’s largest gold miners (“majors”) have only managed to organically replace around half of the gold they have extracted, and a significant proportion of these replaced ounces comes from raising the gold price used in reserve calculations not exploration.

Decline in Reserves of The Ten Largest Gold Miners

This has created a reserve crisis for the gold majors with Proven and Probable Reserves now 30% lower than they were in 2012 and the estimated operational life of these reserves is down from 29 years in 2012 to just 22 years as of 2020.

These dwindling reserves could also be a contributing factor behind the fall in gold production from the major gold producers. Annual gold production from these 10 companies has been declining for 14-years and is down by over 5.5 million ounces from a peak of 30.3 million ounces in 2007. The declining production levels over the past 14-years has helped drive the gold price to its highest average annual level in 14-years, reaching US$1,799 in 2021.

Decline in Gold production of The Ten Largest Gold Miners and Increase in Gold Price

The gold majors have consistently under invested in exploration with 2020’s exploration budgets from these companies at its lowest level in over 12-years at US$953m, 52% down from its highs of US$1,978 billion in 2012.

Decline in Exploration Spend of The Ten Largest Gold Miners

Alongside this, the majors have consistently been reducing their net debt positions since 2014, and as a result net debt has been aggressively reduced by 73% in just 7-years. This means the balance sheets of gold majors are the healthiest they have been in 10-years and they are well positioned to commence an acquisition spree.

The last time the majors net debt was this low was in, 2010 and  there was a 285% increase in the total annual value of gold transactions with the average deal price per ounce rising from US$52/oz to US$142/oz Au, or from 5% to 12% of the gold price at the time. That’s U$98/oz to US$210/oz at current gold price of US$1,814/oz Au.

Change in Net Debt of The Ten Largest Gold Miners and Total Acquisition Spend

While these gold majors are not openly discussing their plans for M&A, possibly to keep acquisition prices lower, the gold majors will have to begin to make consistent acquisitions in order to continue to offer investors visibility on long-term stability.

This is likely to create a perfect storm during 2022 of cashed up major gold producers with depleted gold reserves and market pressure to bulk up, combined with new gold asset scarcity and high-gold prices, forcing the majors, and other gold producers to start acquiring new discoveries. This in turn will drive investor interest back into the gold exploration sector and help to push up the acquisition prices of these deals.

2021, saw some massive deals with the $10.6 billion merger between Agnico Eagle Mines Ltd. and Kirkland Lake Gold Ltd, Fortuna Silver Mines’ US$624 million acquisition of Roxgold and Regis Resources’ US$696 million acquisition of a 30% interest in AngloGold Ashanti’s Tropicana Gold Mine from IGO.

Momentum continued to build throughout the year culminating in the November/December announcement of Newcrest Mining Ltd.'s US$2.8 billion takeover of Pretium Resources and Kinross Gold Corp.'s US$1.4 billion acquisition of Great Bear Resources.

The buying has already commenced; the market just hasn’t realised it yet.