17 February 2020
The scramble for more gold
You can understand why Ramelius Resources (ASX: RMS) went out last week and unveiled a cash and scrip takeover offer for Spectrum Metals (ASX:SPX).
It’s far, far cheaper to buy ounces in the ground than find them yourself. At a panel discussion last week at the West Australia Mining Club, the audience was provided with an extraordinary figure: over the past decade, 850 gold discoveries with more than 100,000oz have been made — that’s a discovery cost of $234 million, or roughly $2,000/oz. Buying another company and its gold resource would work out a lot less.
(Most of the money spent on those finds has had to be replaced, hence the constant flows of placements and shareholder purchase plans.)
Ramelius is paying $208 million for Spectrum; the known contained gold at Spectrum’s Penny West project is 355,500oz; so that $208 million is, per ounce, less than a quarter of the price of gold (with gold over the weekend at A$2,357/oz) — although with the cost of mining it to come.
Of course, the high grade is very much part of the attraction: 13.8 grams a tonne. Plus the potential for enlarging the discovery. Already, though, Penny West is one of the highest grading undeveloped gold assets in Australia.
Of course, for the Spectrum owners it is payday, the price paid being a 52% premium to the preceding closing price. The company listed in 2007 as Territory Uranium and in 2014 became Spectrum Rare Earths with a project in the Northern Territory.
Switching to gold saved its bacon.
The problem is that many companies are now looking to buy rather than find gold, none more so that the global majors. So there is stiff competition; for most gold hopefuls, there will be no alternative to sticking to the hard yards of drilling and assaying.
Potential predators — and gold share speculators — are no doubt combing through the list of Australian-listed plays, looking for targets.
Who can blame them? There has been a veritable flurry of recent deals in the gold space: Titan Minerals (ASX:TTM) buying Canadian-listed Gore Gold for its projects in Ecuador; speculation that Newcrest Mining (ASX:NCM) could be interested in taking full control of Vancouver-based Lundin Gold (in which NCM is the largest shareholder) and its Ecuadorian gold; Chinese giant Zijin Mining mopping up its C$1.4 billion takeover of Continental Mining and its gold mine in Colombia; and Kirkland Lake Gold buying up its Ontario neighbour Detour Gold.
And “going for old” we mentioned last week is not letting up. This morning Gladiator Resources (ASX:GLA) announced it had acquired two historic gold projects in Victoria, one being the Rutherglen deposit which up until 1920 had produced 1.4 million ounces. And there has been an interesting presentation by Calidus Resources (ASX:CAI) on its Warrawoona project in East Pilbara; the company has consolidated more than 200 historic workings going back to the 1890s.
Carry on exploring
The top four countries when it comes to mineral exploration spending are, in this order: Canada, Australia, the US, and China.
According to figures from Melbourne-based MinEx consulting, since 2012 Canadian exploration outlays have fallen 66%, American outlays down 63% and Chinese exploration investment down a whopping 78%. So Australia — down only 22% — doesn’t look so bad.
For gold explorers, at least, investors are still ready to listen.
Shares in Norm Seckold’s Sky Metals (ASX:SKY) lifted 114.3 last Monday and another 24.4% on Wednesday after reporting to the market latest drilling 20km west of Goulburn, NSW. Intercepts included 93 metres at 4.24 grams/tonne. (It continues to stagger this writer that the NSW government doesn’t try and promote its mineral industry more — but then what can you expect from a government that allows exploration for uranium but bans mining it?)
On Tuesday shares in Moho Resources (MOH) shot up 172% per cent on drilling results at East Sampson Dam, 50 clicks north of Kalgoorlie. Of the 29 holes, 28 returned assays greater than 0.5g/t, one of the best returned 4.7g/t over 15 metres.
As with Sky Metals, Moho is run by a team with previous runs on the board.
A new rare earths quandary?
The fear to date in the industrialised nations — particularly the US and Japan but also in Germany — is that China won’t supply them with rare earths at some point, as Beijing will need them all for the “Made in China 2025” technology goal.
But now a different problem has emerged: that the situation may be near when China cannot supply rare earths — and all because of the coronavirus.
And not just rare earths, but other key minerals as well.
We have already seen Chinese companies that manufacture components being unable to meet orders and, among other things, meaning that auto plants have had to close because they’ve run out of key components (Fiat Chrysler in Serbia being the latest.) Why should this not apply to minerals and metals as well?
Leading US technology commentator Jack Lifton says that the flow of minerals out of virus-affected areas has already begun. More important, says Lifton, there has been disruption in the flow of chemical reagents needed to refine rare earths for producing metals, alloys, and magnets.
Manufacturers of mobile phones, colour televisions (the element europium making possibly for red colours on screens), home appliances, wind turbines, magnets, alloys — supply of all these and more could become problematic.
It used to be said that it took on average 13 years to get a rare earth project from discovery to production, but that has turned out to be too optimistic. After all, Alkane Resources (ASX:ALK) began work on its NSW deposit in the late 1990s. Several local newcomers have emerged as rare earth plays in recent months; last week Oro Verde (ASX:OVL) reported promising metallurgical recoveries from its Uganda rare earths project.
But none of the newcomers is going to solve any near-term shortage.
Now the Americans have finally woken up after letting China take over from it as the world rare earths power. The US Geological Survey announced last week it is deploying drones at home and abroad to search for potential rare earths deposits.
The US does have some domestic production — but it is all shipped to Chinese buyers for processing, the Americans having shuttered their processing plants and seen them move to China and Germany.
CRU Group in Britain points out that Hubei, China’s coronavirus headquarters in and now in almost total lock-down, is also that country’s largest producer of galvanised zinc sheeting for the auto industry. Hubei might not have any lead mines, but it is a notable lead recycling base, producing 10% of China’s lead for battery use.
CRU also notes that China is the largest phosphate producer, consumer and exporter of phosphate fertilisers, with Hubei province being the base of the industry. Hubei is home to 32% of China’s phosphoric acid capacity and is a leading producer of diammonium phosphate (DAP) and monoammonium phosphate (MAP).
Expect some impact on nickel, with China accounting for 38% of the metal used in EV batteries, if the Chinese auto market slows significantly due to the virus emergency. Adamas Intelligence says the world’s battery makers last year used 59,271 tonnes of nickel in EV batteries, up 39% on 2019.
As for coal, Daniel Hynes and his commodities team at ANZ report that China’s electricity output reached an all-time high in 2019. Import restrictions and quotas have resulted in subdued seaborne coal sales to China (and thermal output fell 4% last year) while nuclear (18% up) and solar (13%) saw sharp increases. That said, the coronavirus has led to many coal mines being closed. “If coal production falls by 10% this quarter, it would leave a deficit of around 35 million tonnes to be met by important coal,” they write.
Capital Economics reports that China’s Metal Association has revealed that nonferrous production will fall in February by at least 10% year-on-year owing to lack of raw material, transport issues as well as labour shortages. Capital says these cuts are most likely to occur at copper, zinc and lead smelters. Restricted road and rail transport are making it difficult for smelters to offload by-product, such as sulphuric acid.
“Steel production is also at risk,” these analysts say. Major producing regions, such as Hebei province, remain largely locked down. “What’s more, most of China’s steel is produced using blast furnaces, which are highly dependent on imported iron ore.”
And Japan’s Yomuiri Shimbun newspaper is reporting that, of 333 coal mines in the Inner Mongolia Autonomous Region, only 72 were operating last Wednesday. The paper also says there are 12 empty LNG carriers anchored off Qatar as Asian orders have been cancelled, while dozens of sailing from China meant to be carrying finished goods to the US have been cancelled; AP Mollar-Maersk, the huge shipping empire, reported 27 blank sailings (that is, where ships do not end up loading at planned locations) from China since January 31.