ASX-listed juniors are warning that the much-anticipated increase in corporate activity in the gold mining sector may stall due to a sheer lack of substantial projects for majors to acquire.
While analysts widely believe merger activity will pick up, with gold companies likely targets, the Australian Bureau of Statistics recently warned of an alarming drop in greenfields exploration, which juniors now believe will leave majors with nothing to acquire to top up their own reserves.
Western Australia-focused Great Western Exploration Ltd.'s managing director, Jordan Luckett, said gold exploration in general had long been underfunded, with mines getting deeper and more expensive. The alternative for companies was to find a new discovery nearer to the surface or move into more politically risky jurisdictions like central Asia or Papua New Guinea where the geology is "tremendous."
"There are still opportunities to find near-surface gold deposits, they're just getting harder and harder," Luckett told S&P Global Market Intelligence on the sidelines of the ResourceStocks conference in Sydney on May 16.
He said there was a "disconnect" between mid-tiers in the gold industry who are making substantial returns and juniors who have not seen that sentiment translate into them receiving similar levels of investment, leaving a dearth of decent gold projects for the majors and mid-tier gold companies to acquire.
"The prefeasibility study of an extraordinary project might see a major move, but majors can wait until it's been completely de-risked or even until it goes into production to ensure it meets their criteria, then they have the funds to buy them as operating mines," Luckett said.
Ron Heeks, managing director of Geopacific Resources Ltd., which recently released the pre-feasibility study for its Woodlark Island gold project in Papua New Guinea's Milne Bay Province, said much of the hundreds of millions of ounces sitting in the majors' resources inventory are "not real ounces," in the sense that "they can't mine it because they're not economic now and probably won't be in the future because they're [very deep] down or just incredibly low grades."
"The next five to six years will be very interesting because some of the majors' big projects will run out, as they're putting more and more tonnes through by operating at lower and lower grade," he told S&P Global Market Intelligence.
Heeks said that while the majors have done a good job of lowering project costs, he warned that grades are getting dangerously low.
"These big companies don't know what exploration is anymore. They used to have world-class teams but they sacked them, which was incredibly short-sighted because it takes 12 years to develop a project," he said.
"No money has been going into juniors for the last five years, so that food chain that the majors are relying on has stopped.
"The industry has always been cyclical but it's getting more extreme as the panic sets in, because everybody is starting to realize this stuff is running out, so the price is going up, and eventually it will get to a point where it gets stupidly high, like it did in 2010, instead of a gentle up and down."
A host of supporting factors
ANZ Senior Commodities Analyst Daniel Hynes told ResourceStocks delegates that mine supply was an "ongoing issue" that supports the gold price.
"It hasn't been easy going despite the relatively good conditions, with the Australian dollar gold price being quite strong, but it is becoming increasingly difficult to find supply and we are seeing weakness in the output-supporting gold," Hynes said.
Heeks said that while the market was yet to wake up to the lack of gold supply in a big way just yet, "in 18 months you're going to see a dramatic effect, and when people are trying to do high-priced M&A deals, that's when you know there's less [gold supply from mines], because [the majors will] buy whatever at any price just to get ounces on the bottom line of their business."
Though the impact of the Greek debt crisis, the Chinese stock market crash and even Britain's exit from the European Union was limited, Hynes said that with volatility occurring on a "more sustained basis," ANZ expects the impact going forward to be "quite significant."
Hynes said inflation broadly picking up across the world — a trend ANZ believes will continue this year — is also supportive for gold in the medium term, in combination with rising energy and oil prices.
Corporate advisory Patersons noted in its Morning Market report May 16 that spot gold prices had "tanked" in overnight markets, taking the spot gold price under US$1,300 an ounce for the first time since very late December 2017.
"Some of the precious metal's sell-down was attributed to the quite solid April retail sales report as well as other above expectations economic releases out in Tuesday New York business, which had more investors thinking the Fed funds rate might by hiked four times over the course of calendar 2018."