Financial returns from exploration positive again
Over the past two years, there has been a 67.4% recovery in the in-situ value of a global average resource ounce, from US$10.06/oz in August 2014 to US$16.84/oz currently, and a relative normalisation of the market regarding the average valuations of the three JORC resource categories. Assets remain cheap. Nevertheless, the financial return from drilling a 1Moz gold resource is now positive, on average, for the first time since August 2013 (although not necessarily for assets listed in Canada). By contrast, financial returns from both uranium and PGM exploration have deteriorated. In the meantime, exploration to delineate measured resources is likely to be a value-destructive exercise for a number of (typically) ‘bulk’ commodities, although these tend to be minerals that also benefit from the market’s discounting of future exploration success.
Physical limitations created by financial boundaries
In this report, for the first time we expand our analysis of NonSuch Gold to calculate the physical limitations conferred on projects by the investment returns required by financial markets and conclude that companies with otherwise ‘average’ gold projects will find them difficult to finance in countries with a Fraser Institute Investment Attractiveness rating below Myanmar. Similarly, companies with projects in countries of roughly average Investment Attractiveness (eg the DRC, Poland, Colombia, Brazil, Madagascar) are unlikely to find equity financing easily forthcoming unless the grade of their deposits is (all things being equal) at least 1.66g/t.
Gold price forecasts
Finally, we have updated our analysis of the price of gold with respect to long-term trends in the US total monetary base and inflation. Within this context, the decline in the price of gold in 2015, coincident with a (very rare) decline in the US total monetary base, should not be a surprise. Hereafter, we estimate that the gold price should average US$1,328/oz in 2017, before rising above US$1,600/oz in 2020. It should then trade within US$50/oz of US$1,650/oz until 2023, at which point it will begin a (fairly) steady rise to reach US$2,000/oz in 2027. In the meantime, on the basis of the historic correlation between the two:
- The current gold price (US$1,320/oz at the time of writing) discounts a US total monetary base of US$3.1tn (cf US$2.7tn when QE3 was announced).
- The end-2015 total monetary base implies a gold price of US$1,597/oz.
- The forecast end-2016 total monetary base implies a gold price of US$1,682/oz.
We estimate that a rapid return to unequivocally positive real interest rates could be worth in the order of US$520/oz off the price of gold. On the other hand, monetisation of balances maintained by banks and depositary institutions at the Federal Reserve could be expected to project gold into the range US$1,860-2,093/oz.
To read the full report, click the download button at the top of the page.
