Investment Contrarians

Mining Company Turns Shania Twain into Gold

By for Investment Contrarians |

Mining-Company-Turns-ShaniaSince hitting a low of $253.70 in July 1999, gold prices have surged over 650%, topping $1,921 per ounce in September 2011. Currently trading at more than $1,660 per ounce, gold has logged 13 consecutive years of positive returns. While some economists think gold’s historic run will come to an end, others are not so sure.

The overarching driver of the price of gold will continue to be the global financial crisis, ongoing tensions in the Middle East, weaker currencies, and the potential for faster inflation. As a result, some analysts believe gold will rise above $2,200 an ounce in 2013.

At the other end of the spectrum are those bears who think gold is in for a big correction. Greater-than-expected U.S. growth, a stronger U.S. dollar (in spite of the Fed’s printing presses running overtime), and the end of the crisis era could pull gold down to as low as $1,200 an ounce.

Try telling that to Russia, Brazil, Korea, China, Kazakhstan, Turkey…

To stave off the negative impact of the global crisis, the National Bank of Ukraine raised the percentage of gold in its reserves in 2012 to 7.7% from 4.4% a year ago, reaching 1.1 million troy ounces. (Source: Chanjaroen, C., “Russia, Kazakhstan Expand Gold Reserves as Central Banks Buy,” Bloomberg, January 28, 2013, last accessed February 6, 2013.)

Brazil doubled its gold holdings in two months, buying 17.2 metric tons in October and 14.7 metric tons in November. And in August and September, Iraq increased its gold reserves to 31.1 metric tons from 5.8 metric tons.

The Bank of Korea increased its gold reserves by 20% in November—boosting holdings for the fourth time since June 2011. The bank added 14 metric tons in November, bringing the total to 84.4 tons, or nearly $3.8 billion.

During the third quarter of 2012, the world’s central banks bought a total 97.6 metric tons of gold. And in six out of the last seven quarters, central bank demand has been around 100 metric tons.

Russia and Kazakhstan expanded their gold holdings in December. Russia increased its hoard by 2.1% to 958 metric tons, making the increase over 2012 to 8.5%. Kazakhstan’s holdings increased 1.7% to 115 tons last month, and soared 41.0% over the year. Not to be outdone, Turkey’s holdings surged 14.5% in December to 360 tons.

Thanks to increasing demand and a serious decrease in supply coupled with ongoing geopolitical tensions and a persistent global economic crisis, I cannot see the price of gold plummeting.

Despite trading in a tight range since late 2011, the fact of the matter is that gold mining companies are having difficulty filling demand. And they are looking everywhere to avoid a production shortage, or rather to shore up the production shortage.

Simply put, the supply has not kept up with the rising price of gold, and worse, production is declining in mature areas.

Since 1997, the gold mining industry has made 99 significant gold discoveries, but those are expected to replace just 56% of the gold mined during the same period. It’s even worse for supergiant discoveries (more than 20 million ounces). During the 1980s and 1990s, there were 25 supergiant discoveries. Over the last three years, there has been just one such discovery. During the first decade of the new millennium, there were five—a 76% decline in supergiant discoveries.

But it’s not for lack of trying. In 2011, a record $8.0 billion was spent on gold mining exploration. Even if gold prices were to soar past $2,000 an ounce, investors wouldn’t see production run in step. (Source: “Gold Mining Discovery Rate Falls Despite Record Exploration Spend – 13 November 2012,” BullionVault, November 13, 2012, last accessed February 6, 2013.)

Gold is in short supply; so, too, is the quality. Ore grades have tanked from an average of 12 grams per tonne in 1950 to roughly three grams in Australia, Canada, and the U.S. In some cases, grades have dropped to one gram per tonne. (Source: Alley, A., “The looming gold ‘production cliff,’” Mining.com, February 1, 2013.)

In a nutshell, discovery rates are down, supergiants are rare, mine maturity is up, discovery costs are up, development time is up, and technical risk is up.

Where are gold mining companies to go to fill the void? Pretty much anywhere it seems.

It was announced last week that Goldcorp Inc. (NYSE/GG;TSX/G) agreed to acquire the Shania Twain Centre in Timmins, Canada. Not because it wants to diversify its operations; rather, it wants to develop an open pit gold mine. (Source: Nelson, J., “From gold records to a gold mine: It’s curtains for Shania Twain Shrine in Timmins, Ont.,” The Globe and Mail, January 11, 2013, last accessed February 6, 2013.)

While the modern and sleek memorabilia shrine to Shania was attracting thousands of visitors each year, GoldCorp knew that the gold-flecked land underneath was more valuable than the museum perched on top. In an effort to get its hands on more of the precious metal, the company plans to demolish the $10.0-million museum to start mining.

If buying developed land and demolishing a museum to mine for precious metals isn’t an example of a gold rush and need to fill the supply void—I don’t know what is.

As investors, you can either listen to the precious metal bears or GoldCorp—the fastest-growing, lowest-cost senior gold producer, with operations and development projects in politically stable jurisdictions throughout the Americas; a company that also happens to have an aggressive acquisition strategy and will do whatever it takes to increase its holdings and generate revenues.

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