I'm in Qinghai province at the moment, where a director of the state geological brigade just told me that the number of geologists they have in the field has tripled from 5,000 last year to 15,000 this year. They plan to drill 1,000,000 meters – yes, one million meters – of exploration drill holes this year. Their budget is 4.0 billion yuan, or about US$625 million.
All of this in just one province.
This also happens to be the province where Inter-Citic Minerals (T.ICI), a Canadian junior explorer in our portfolio with a multimillion-ounce gold project, has just announced that it's in negotiations with a potential buyer. The stock has doubled in less than a month. I'm happy to say that exactly this possibility was the reason I encourages subscribers to average down on this stock in the last few editions of Casey International Speculator.
This is exactly the kind of positive volatility that junior mining stocks deliver best.
Food for thought as you consider our report today on gold mining in Europe.
'Til next week,
Senior Metals Investment Strategist
|Rock & Stock Stats|
One Month Ago
One Year Ago
|Gold Producers (GDX)||42.31||46.79||59.27|
|Gold Junior Stocks (GDXJ)||18.51||20.79||37.97|
|Silver Stocks (SIL)||17.78||19.25||26.37|
|TSX (Toronto Stock Exchange)||11,514.53||11,497.87||13.324.94|
By Alena Mikhan and Jeff Clark
Europe has a long mining history and to this day still possesses a sizable chunk of the world's natural resources. Over the past few decades, however, EU countries have mostly imported their resources. This was easier, cheaper, and avoided most environmental conflicts. But now the trend seems to be reversing, due in no small part to the dragging economy and the real benefits of jobs and tax revenue that mining brings.
Overall interest in mining and exploration is increasing in Europe, as evidenced in Brussels, the continent's political center. A "Raw Materials Strategy" was initiated in 2008 and then revised and updated in 2010 and early 2011. Among other purposes, the initiative seeks to encourage sustainable supplies of raw materials from within the EU and calls for policies in support of domestic mining. In September 2011, the European Parliament adopted the "EU Raw Materials Strategy," a generally pro-mining document, though it's sometimes criticized by the industry for being "too bureaucratic." Quelle surprise!
It's positive, of course, that the political climate in Europe is at least in theory becoming more supportive of mining. Industry players also see new opportunities here: encouraged by high commodity prices, many mining companies have reopened abandoned mines and are explored ignored parts of the region.
Within Europe there are three main zones of metallogenic significance for gold: the Iberian Pyrite Belt; the Carpathian Arc; and the Baltic Shield. The first crosses from Portugal through southern Spain. The second stretches from the Czech Republic through Hungary, Slovakia, Bulgaria, Ukraine, Romania, Serbia, and into Turkey. The Baltic Shield traverses from western Russia through Finland, Sweden, and Norway.
Europe's gold mining contribution is approximately 1.2% of global mine production (though demand from the EU is roughly 15% of worldwide totals). Sweden, Finland, Spain, and Bulgaria are currently the largest gold producers in Europe. They mine about 640,000 ounces of gold annually. Other countries with operating gold mines are Greenland, France, Greece, Romania, Portugal, Slovakia, and the UK.
The gold mining sector in Europe represents 16,000 direct and indirect jobs, as of 2009. Among the gold companies operating in the region are Eldorado Gold (EGO) in Greece and Romania; Agnico-Eagle (AEM) in Finland; and Gabriel Resources (T.GBU) in Romania, as well as other majors and juniors across the continent.
2011 was a banner year for European mining. Exploration expenditures were estimated to reach approximately €400 million (US$490 million), an all-time high. The largest share of those exploration dollars was concentrated in Sweden, Finland, Norway, and Greenland. These countries, together with Poland, accounted for €288 million or two-thirds of total exploration expenditures last year.
This is even more impressive when put into historical perspective. As you can see in the chart below, Nordic exploration spending has grown almost four times in just ten years.
Both local and international companies are active in this region. Further, junior companies are expanding rapidly; Euromines reports that in Sweden, for example, juniors account for some 50% of total exploration dollars being spent. That's particularly impressive when you remember that junior company budgets are typically smaller than the majors'.
Why has the attractiveness of the Nordic countries increased so dramatically?
Europeans tend to be very concerned about ecology, so environmental issues are closely watched and strictly regulated. Though most responsible miners make concerted efforts to reduce their impact on the environment, miners in Europe focus on this to a high degree.
The divide between miners and environmentalists has shrunk over the past few decades due to advances in technology. But a bigger reason for the cooperation is the eroding economic situation. To a certain degree, politicians have been forced to find a more reasonable balance between conservation and the economic benefits mining can bring.
Spain, for example, has its economic back to the wall, starting with a record unemployment rate of more than 24%. Enter Astur Gold (V.AST). The company is working on getting the Spanish Salave gold deposit into production (which a previous company failed to do in 2005). The jobs it will bring no doubt add to the appeal; the company has received over 6,300 job applications. Management has received two of three environmental permits and hopes to finalize the third by year end. If the project is fully permitted, the economic impact on the area will be both immediate and dramatic.
The biggest threats to mining in Europe are resource nationalism, significant skills shortages, and infrastructure access in certain areas (see first news item below). However, even on these issues, Europe is in a better position than many other areas. The continent has a strong tradition of transparent and stable laws, along with respect for private property, leaving few in support of outright nationalization. Western European countries also usually have well-developed infrastructure and an educated and skilled labor force.
On the other hand, bureaucratic procedures, overregulation, and a dense population outside of the northern countries have worked to keep massive mine development across Europe from accelerating as it has elsewhere.
Still, the carrot dangled by the mining industry looks awfully juicy…
If Romania approves Gabriel Resources' Rosia Montana gold mine, for example, the project is estimated to bring some US$30 billion of economic benefits to the country. The company hopes to mine 9.6 million ounces of gold and 51.5 million ounces of silver over 16 years. Eldorado's Olympias and Skouries mines in the Halkidiki region will produce about 350,000 ounces of gold annually beginning in 2015. Management is spending €1.3 billion to develop the projects, which will create 1,800 jobs in a country where unemployment is close to 20%.
Overall, the atmosphere for gold mining in Europe appears to be improving. Its importance is recognized in Brussels; even though only a few clumsy steps have been taken, the general attitude is making a positive shift. With the benefits mining can bring – more jobs and greater revenue – we think there will be fewer objections overall, especially in the more desperate countries. It won't solve all their problems, but there's no doubt it would relieve some of the fiscal pressure.
From an investment point of view, it's a region to watch. We fully expect to find increasing opportunities here.
One current opportunity involves a miner so promising that Jeff's buying it for his mother's retirement account. This company expects to boost annual gold production by 127% – to 1.5 million ounces – by 2015. It plans to hit 1.7 million ounces by 2016, a 158% jump which would put it among the world's fastest-growing senior gold producers.
You can learn all about this company and three other must-have mining stocks in a new special report, The Four Stocks I'm Buying My Mother. Right now you can get it for free just for taking BIG GOLD for a risk-free test drive.
Business Risks Facing Mining and Metals, 2012-2013 (Ernst & Young)
Ernst & Young updated its report on business risks facing mining and metals. The biggest threats are resource nationalism, skills shortage, and poor infrastructure. These three, plus "rising costs" and "maintaining a social license to operate," have been in the top-ten list for over five years.
The complete list doesn't look much different from last year's, but Ernst & Young has noticed a trend: "The risks facing the sector have become more extreme and more complex over the past 12 months due to the fast changing investment and operational environment."
No surprise. The update is worth a read, however, because it gives recommendations on how to avoid the risks.
Bolivia is nationalizing the Malku Khota mine that belonged to South American Silver Corp (T.SAC). The reason given is that the Vancouver-based miner was responsible for the violent conflict between two communities surrounding its project.
Malku Khota is a silver-indium-gallium deposit. The exploration-stage project was eventually expected to produce about 13.2 million ounces of silver per year, according to a preliminary assessment.
Bolivia has since claimed it will compensate the company for revoking the mine concession. South American Silver says it has invested around $16 million in the project since 2007, but the government proposes only $2-3 million based on its own calculations.
Nationalization risks in this particular country are extremely high. Besides Bolivia, other Latin-American countries are taking part in the nationalization trend, as you can see in the visualization courtesy of The Globe & Mail.
Gold Is a Strategic Asset for UK Investors (World Gold Council)
Researchers at the World Gold Council analyzed five portfolio strategies (from conservative to aggressive) using data amassed over 25 years. They came to the conclusion that adding gold to a portfolio delivered better risk-adjusted returns and/or reduced the maximum expected losses. Further, they found that portfolios including gold outperformed those lacking it in multiple tail-risk events, especially during the recent crises.
"Gold benefits sterling-based investors for multiple reasons. It effectively helps manage risk in a portfolio, as it increases risk-adjusted returns and reduces the expected losses incurred during extreme market events. In the long term, gold's diversification credentials increase portfolio efficiency, both in good and bad economic times."
The analysis suggests that for the average UK investor, even small allocations to gold – ranging from 2.6% to 9.5% – have a positive impact on the structure of a portfolio.
In Gold We Trust (Mineweb)
Switzerland-based Erste Group just released its sixth annual gold report, one we always look forward to. Author Ronald Stoeferle shows how gold is coming back into fashion and asserts that the metal's next stop is $2,300/ounce – a price he feels may end up being "on the conservative side." We highly recommend reading this powerful, detailed report which you can link to from the Mineweb article.