Title Spotting Quality Gold Assets Early Degree of recognition National Media name/outlet ResourceStocks Magazine - Aspermont Media type Country Australia Date 3/11/14 Description Spotting Quality Gold Assets Early
Digging Deeper this month takes a closer look at what defines quality amongst gold assets – with key input from Matthew Kanakis who recently completed a benchmark study of Australian and New Zealand gold mines.
Gold mining and exploration is very familiar territory for the vast majority of resources sector investors. With around 50 gold mines in operation across Australia at present, a plethora of data becomes available for investors to digest each and every quarter. Production volumes, run-of-mine grades and costs per ounce form the backbone of the reported information available. Indeed, Digging Deeper expects that most investors stop right there. Certainly the gold sector investment mantra that “grade is king” suggests a focus upon mine grade from one asset to another has become something of a proxy for asset quality in gold.
Those wishing to dig a little deeper however can also seek to evaluate the underlying geology of the gold deposit, the specific style of gold mineralisation, the type of mine itself (open pit versus underground) and whether, for example, various geometrical factors of the gold deposit lend themselves towards low cost production.
Matthew Kanakis, of the Centre for Exploration Targeting (CET) at the University of Western Australia recently did just that in a landmark new study.
What Kanakis found will surprise not only gold-focused investors but also experienced gold industry professionals. Put simply, instead of costs falling as mine grade increased; there was no easily discernible relationship between costs and grade despite the abundance of cost and grade data in the study (which covered the information reported by companies throughout the July to September and October to December periods in 2013).
The insight from this observation could rewrite the playbook of gold investment – in particular when investors look at earlier stage gold prospects still at exploration stage. That is, once actual commencement of gold mining has taken place, the quarter-by-quarter cost data from an asset form the overriding indicator of quality more so than do technical factors such as grade. Prior to commencement of mining however, cost data are mere projections at best, and at early stage projects are non-existent.
So what other factors might investors seek out if the obvious candidate, gold grade, now appears to be a poor indicator of likely future production margin?
Kanakis uses statistical tests to show that whilst grade appears not linked with lower costs from mine to mine that the following geological parameters do indeed appear to favour lower cost gold production:
1. Equidimensional orebody geometry. Deposits that have roughly equal dimensions are lower cost in the study. That is, easily accessible near-surface gold accumulations lend themselves to far lower costs of mining than small elongate deposits that require intricate underground development in order to access and mine. Kanakis compared equidimensional deposits to cylindrical and planar geometries: The first category won out as having lower costs. Geometry matters when it comes to picking quality.
2. The style of gold mineralisation is a further factor that has relevance to realized production costs. Broad disseminated zones of mineralization with gold throughout prove to be a lower cost target than are tighter discrete gold mineralization structures (everything else being equal). The former mineralization style allows more flexibility in mining – and may also allow higher production rates to capture scale and scope economies.
3. Host rock also appears to relate to material cost differences in the data. Of the gold deposits occurring in igneous rocks, those mines hosted in plutonic rocks (the remnants of igneous intrusions) have lower cost than those hosted in volcanic rocks. Kanakis suggests that this observation may be related to lower overall rock strength in the ore zones of such rocks, facilitating lower process costs in crushing the rocks and lower blasting costs in initially mining the ore.
So there you have it: Grade no longer appears the undisputed ‘king’ in terms of cost and margin at gold mines. Gold-focused investors are encouraged to dig that little bit deeper.
Persons Allan Trench