Dust flux, Vostok ice core

Dust flux, Vostok ice core
Two dimensional phase space reconstruction of dust flux from the Vostok core over the period 186-4 ka using the time derivative method. Dust flux on the x-axis, rate of change is on the y-axis. From Gipp (2001).

Thursday, May 31, 2012

Gold still number one

Exploration Review for 2011 by D. R. Wilburn et al. is published in the May 2012 edition of Mining Engineering, published by the Society for Mining, Metallurgy, and Exploration. The survey covered companies that had annual exploration budgets greater than $100 k. Thus small companies like (e.g., Moose Pasture Exploration, Inc.) were not included.

Some highlights:

Areas of exploration interest were divided as follows: Canada, the United States, Australia, Latin America, Africa, Pacific Region, rest of the world.

The area with the greatest exploration money spent was Latin America, followed by Canada and Africa. More exploration targets were reported in Canada, suggesting that the Canadian projects on average were not as far advanced as the LatAm targets.

A troubling aspect of the pattern of expenditure is that the primary focus has been late-stage projects, at the expense of new exploration. This means that although we may see increases in mineral production in the coming years, in the medium to long-term, it will be very difficult to increase (or perhaps even maintain) mineral production.

In terms of exploration effort for non-fuel minerals (meaning no coal or uranium), gold came out on top with 51% of the global exploration budget. Base metals followed at 32%. Diamonds and PGM continued their fall from grace, with only 2.5% and 1% of the entire budget, respectively. Exploration effort for diamonds was at 12% as recently as 2006.

Relative expenditure of exploration: gold vs. copper. 
Data from Exploration Review dating back to 2002.

Gold is still number one. The amount spent on copper appears to have been in decline since 2008, which may mean that the mining industry does not have much faith in the China growth story. Unfortunately, the data in the last few years did not separate copper expenditure from the rest of the base metal complex, so I have used an estimate of 60% of all base metal expenditure was for copper, which was the average for the years where data were available.

Lots more is available at the original site (pay site, sorry about that). Parts of the report should be made available appear later this through USGS.

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Why is gold so important?

Gold is the nearest thing to a substance with constant marginal utility. Constant marginal utility implies that any additional gold you acquire has as much value to you (utility) as the first bit you acquire. There is a minor disagreement to those who assert that gold has constant marginal utility and those (like myself) who argue that it does not, but is closer to that state than any other material for reasons discussed by Aristotle. (Fiat currency -- rather money whose value was to be defined by wise men -- was favoured by Plato).

I am willing to consider Professor Fekete's argument that gold has constant marginal utility, but demand is not infinite due to the phenomenon of interest paid on (non-gold) deposits. The higher the interest, the more likely that an individual will prefer money to gold (discounted for sovereign default, of course). At present, with interest rates being the lowest on record and the discount rate for sovereign default being similarly low, there is understandably a lot of interest in gold.

The constant marginal utility of gold reduces the economic risks of mining it, for it means that the market will never cease buying it (although price may vary). Base metals may have a high price, but their demand is limited, and if demand can be filled by your competitors before you can get them to market, you may not find buyers.

But most mining companies don't base their decisions on exploration on such criteria. For most companies, the question is which commodity will attract retail and institutional investment? Gold turns out to be better than graphite, for example, because it requires no explanation. Everyone knows what gold is. They don't all know what graphite, or rare earths are.

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