Lassonde calls for new thinking in the exploration game

VANCOUVER — The final day of Mineral Exploration Roundup 2013 featured a keynote speech from industry veteran and Franco-Nevada (FNV-T, FNV-N) chairman Pierre Lassonde. Though best known for his often bullish stance on long-term gold prices, Lassonde changed gears and focused instead on Canada’s exploration industry and the need for co-operation and innovation.

He noted a production lag relative to gold-price increases, citing the jump in prices from US$35 to US$800 per oz. during the 1970s, and how it took seven years for production to catch up. Gold production more than doubled from 1980 through 2000 before gold prices fell to lows of around US$250 in the early 2000s. Now, with gold’s resurgence, companies are again scrambling to boost output, but have struggled to realize market value due to rising capital and operating costs.

“Last year we produced as much gold as we did in 1999 — so are we looking at further increases? And what has happened to gold stocks?” Lassonde asked. “Well, that’s the interesting part. Back in the 1970s the stocks did really well. It is not happening this time. In fact, if you look at the S&P/TSX Global Gold Index vis-à-vis gold, we’re actually touching new lows. And you know that the junior exploration companies over the past two years have not been able to get a lot of funding. And you say: ‘Why? What is happening?’ There are four reasons for it.”

The first point, he argued, is that the rate of new gold discoveries is falling. He pointed out that during the 1990s, explorers delineated, on average, at least seven gold deposits every year that totalled 5 million oz. or more. Over the past 12 years, less than three discoveries per year break that threshold.

Through the 1980s and 1990s there were 25 discoveries that topped 20 million oz. gold (or “super giants”). However, over the past 10 years, there have been only five super giants discovered, none over the last two years.

“If we don’t find those major deposits over a ten-year period, how do you think you’re going to grow or even sustain current production?” he asked. “It gets even worse than that if you look at it a different way — if you start to look at gold discoveries by grade,” he added.

This is Lassonde’s second point: the degraded quality of the deposits companies are now rushing to put into production. He noted that the average grade of deposits in production today is 1.06 grams gold per tonne, while the average of undeveloped gold discoveries is just 0.66 gram gold. The mine and reserve grades have dropped by half just in the last 10 years.

“So what are the miners doing? They are lowering their cut-off grades to chase production.” Lassonde said. “And I tell people, where we are today at cut-off grades with some mines in Nevada, well, the next cut-off grade is called ‘dirt.’ Look at the impact it has on everything else you’re doing. The mining companies are lamenting that their capital costs are going up . . . is that surprising?”

His third point is that capital expenditures used to be around US$60 per-oz., but they have jumped to US$200 to US$300 per oz. owing to declining grades. On the operational side, rising refining costs mean that many companies are producing gold at an average cost of US$1,200 to US$1,400 per oz.

“We are finding a lot of gold, but the size and quality of the deposits have been much lower than what we found historically. The converse of that is that the capital and operating costs have just ballooned, and the margin and free cash flow have not increased with the gold price,” Lassonde said. He predicted that if everything remains equal, current gold production rates should be sustainable for 10 years. “If you look at 80% of the companies talking about their guidance today, what are they telling you? Less production, and higher costs. That’s because of the quality of the deposits: we need better-quality discoveries, and we need more of them.”

Lassonde’s final point is the increasing time it takes to get deposits into production. Lassonde pointed to the development timeline of the Ken Snyder mine in Nevada during Franco-Nevada’s earlier incarnation: it was discovered in 1996 and put into production by 1999. By comparison, he cited New Gold’s (NGD-T, NGD-X) Blackwater gold deposit in B.C., which was discovered in 2010 and is not expected to start producing until 2017. He also pointed to Goldcorp’s (G-T, GG-N) El Morro gold project in Chile, which was discovered in 1996 and is also scheduled to start up in 2017.

“If you’re an analyst and you take a world-class deposit and discount it over 21 years at 8%, I mean, what’s the value? Bupkis. And that’s a problem. If you’re a shareholder these world-class deposits have no value to you. That’s a terrible thing, but it is reality,” he added.

Lassonde offered his solutions to improve discovery rates and mine development in the gold space.

The first is a more research and development in relation to exploration and production technologies. He cited technological advances in the oil and gas industry that have included natural gas fracking techniques and 3-D geophysics. He lamented the mining industry’s use of the same drills for the past 20 years, and pointed out that major processing advances haven’t happened in mining since heap and pressure leaching were introduced in the 1970s and 1980s.

“Where are the new processing technologies? Where are you guys?” Lassonde asked. “The companies are not spending enough money on research and development in this business, and it is suffering. We need a paradigm shift in exploration and exploration technology.”

Lassonde is calling for improved access to land. He criticized the increasing trend of resource nationalism and rising royalty and tax regimes, citing Canada’s “incredible strategic advantage” as the second-largest land mass in the world.
“Exploration is all about land, we know that,” he said. “And 90% of [Canada’s] population sits within 100 miles of the U.S. border, the rest is empty. We should be able to get out there and make discoveries. For sure there is a lot more out there, but we do not have the proper tools.”

Lassonde lamented the loss of risk capital in the mining industry since the global economic crisis in 2007, but assured the audience that risk money would return to the junior sector, though he didn’t say when.

Lassonde estimates that over the past 40 years, junior explorers had accounted for half of the world’s great discoveries, and he said that the industry should work together to drive exploration through innovative technologies and creative strategies.