On The Macro: Context and Requirements To start I want to post (with permission!) this gold price chart from Jordan Roy-Byrne of www.thedailygold.com.
The blue line is the average price pattern from the two best bull markets (1976 and 2008) while the red averages the price from the last four rebounds. Black is us today, clearly tracking the four-cycle average very closely. If gold continues to track like that the price could reach US$1,500 per oz. before the end of the year. Beyond that – well, you can see the possibilities. Including gold priced at US$1,900 by the end of next year. I put this up for two reasons: to stoke excitement, in case anyone is lacking that, and to bestow confidence that it still makes sense to buy stocks today that are already up significantly. A lot of companies will see share price gains if gold follows anything close to the trajectory shown above. Some, however, will rise farther and faster than the rest. My job is to identify which those are, and in recent weeks I've gone through my outlook in a couple different ways (including last week's list of the kinds of opportunities available today). This week I want to outline the project attributes that I think will matter most. In the last bull market bigger was better and few cared about cost. Things will be different this time around. I think this bull market will focus on assets that actually make sense (at least to start – if the market gets really hot then sense could well disappear again). So with pragmatism in mind, here is my list of essential project attributes.
Location. That starts with rule of law (security of mineral rights, reliable fiscal structures, etc) but of equal importance also includes social license (from sage grouse to water rights to spawning grounds to artisanal miners to tree huggers to political impacts) and accessibility (steep mountains? roads anywhere nearby? lots of waterways that would require bridges?) Not every project has to answer all the questions of Could It Be A Mine right off the bat, but major hurdles like these can really limit speculative interest in a discovery.
Infrastructure. People think this only matters in terms of building a mine, but it matters way before then. I was chatting with a geologist yesterday who has decades of experience in Russia. He has a list of prospects in the Russian Far East that he would love to explore – but just to mobilize a drill program there costs $1 million, and that's before the first foot of core. These considerations matter, especially in a market that is demanding consistent news flow (after a long bear market, investors are still jittery and will take gains and run if not given constant reasons to stay. GSV is a perfect example.). The costs of working in difficult locations mean ongoing financing struggles AND gaps between exploration programs, because working constantly is too expensive. Together those represent a big challenge in today's market.
Grade with scale. The last bull market saw miners in an inane race to produce as many ounces as possible, without any thought for making money. That setup led companies to develop marginal assets – decisions that are still hurting balance sheets to this day. Marginal assets will not come back into favor any time soon. The best way for an asset to support better economics is with higher grades. That being said, those grades need to come within a package that offers scale potential – the big returns will come from takeovers where a major bids at a premium to buy a company for its large, high-grade discovery.
Easy. No project is ever easy, but an oxide deposit with good grade that gives up its gold in a run-of-mine heap leach will have a serious advantage over a refractory asset that would require roasting, or even a hard polymetallic ore that needs multiple stages of grinding and floating to produce concentrates.
Historic advantage. Unless it is a brand new discovery (which can also work), there needs to be a reason why the project didn't work in the last cycle and a way the new team is approaching past work differently to make it an asset for them.
The right path for the time. This is a people requirement – the folks in charge of the asset have to consider the project's potential and what is going on in the market to come up with a plan that delivers progress people will care about. Sometimes focusing on putting a small oxide deposit into production makes sense, but in other cases drilling to expand that deposit would deliver much bigger results. Sometimes making a big deposit bigger is important, but other times the market needs metallurgical work and permitting progress and infrastructure plans to accept that the asset makes sense. It depends on the asset, the market, the costs, the timelines, and the goal, but at the end of the day it has to be a story that investors want to hear at the time