by Commodity Online
Thanks to continued precious metals rally, there is a heightened interest in precious metals mining and investments are flowing to this sector, in continuation of a trend that was visible in 2010. Gold prices have recorded an all time high surpassing $1700 as investors flock to precious metals as safe-haven following the debt crisis in Eurozone and USA, making gold production attractive for miners.
Recent reports suggest that exploration, drilling, mining activities have intensified in major regions across USA, South Africa, Mexico and Canada. The Metals Economcis Group Pipeline Activity Index (PAI) rebounded in May, reaching its second-highest level in 2011 before dipping slightly again in June. In May, a sharp increase in drill results coupled with a strong number of financings helped push up the PAI, but a record number of significant drill results in June was not enough to offset a lack of projects advancing and a lower number of financings, MEG's latest report said.
The number and in-situ value of initial resource announcements in May-June was down very slightly from March-April, but was still the second-highest bimonthly total in the past two years. In terms of in-situ value, gold and base metals were both dominated by single projects: Levon Resources’s bulk-tonnage Cordero project in Mexico—with 451 million oz of silver, 3.4 million mt of zinc, 2.8 million mt of lead, and 1.1 million oz of gold—accounts for about 75% of the base metals total and is easily the largest announcement of the period, and East Asia Minerals’s initial estimate of 3.14 million oz of gold and 8.95 million oz of Silver for its Miwah epithermal gold project in Indonesia accounted for more than 60% of the total value of initial gold resources announced in the period.
Meanwhile, ABN Amro Bank-VM Group in a report recently pointed out that gold miners are reaping profits despite higher costs of production due to rising energy, labour costs and lower value of the dollar. Average cash cost of production has gone up in first quarter of 2011 at $620/0Z or 1.8% up from the previous quarter.In South Africa, power supply bottlenecks have also weighed on gold miners’ profits, while wage disputes and geological issues have also contributed. The number of NI 43-101 and JORC compliant resource estimates being released by mining companies have also risen in recent months signifying the rise in drilling acitivity, analysts said.
"Producer margins have widened significantly since the trough in Q4 2008. Globally, the difference between the average production cash cost and average Gold price in Q1 2011 was a record $767/oz – up from $758/oz in Q4 10. This is also some $422/oz more than that seen by gold miners in Q4 2008. Hence for an average gold miner producing 100,000oz of gold each year, profits after production cash costs have been taken into account, are now $42m higher than in Q4 2008. For Barrick Gold, which produced 7.8 Moz of gold in 2010, using the Q1 2011 production costs to price differential and assuming the company had produced a similar amount of gold in Q4 2008, margins are up almost $3.3bn," ABN Amro-VM Group July report said.
Gold mining goes through a complex phase of prospecting, exploration, regional exploration, drilling before reaching the mining stage. Some projects are dropped at the exploration stage, if it is found that the region doesn't have sufficient resources.
"The cost of exploration can vary incredibly depending on a number of factors, but can easily run up to about one-quarter of what actually mining costs, when compared on a per ounce basis of mined gold. Unless we are dealing with a major miner with deep pockets, chances are, at some time during the exploration phase, the explorer will try and raise capital. If the company is not already public, you will most likely see the IPO sometime during the exploration phase. If the company is already public, and even once it goes public, you will most likely see multiple financing phases, used to drum up cash to spend on further resource identification. While you don’t want a company to dilute shareholder value, you do want it to raise money so that it has the money to properly conduct its exploration initiatives. The exploration phase is also where investing can really pay off. This phase may be riddled with volatile stock swings and speculation, but this is also where the swings may be in an investors favour," according to Leia Toovey in Gold Investing News.
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