krypto, i misunderstood your calculations....market cap/oz is right.

with gg i'd also consider the 1.2bil oz of silver and buttloads of tons of zinc, copper, lead. also, i dont know that 20% is a big enough discount...

i use the chart at the bottom as a reference, mineweb updates the story periodically but best case i think you'd see $200oz.... and that would'nt happen until after a few years of fair dealings..imo

Opinion: Re-examining peak gold

Thirty stocks offer 414m ounces of gold resources, valued at an average of USD 77.32/ounce

Author: Barry Sergeant
Posted: Tuesday , 13 Apr 2010

JOHANNESBURG -

One of the seemingly evergreen topics in the maw of discussions about gold hinges raggedly around the notion of "peak gold", which loosely promotes the absolute idea that mine supply is ultimately limited, and that with ongoing demand, prices for the metal must continue rising into eternity, never mind what the rest of the world does or does not do. For some, this may sound like some of the swimmingly imaginative narrative in the book of revelation, from which gold bullion would no doubt also benefit; during and after the apocalypse, the metal would surely become the one and only currency.

The evangelistic that gaze upon gold through a keyhole are more definite in promoting the notion that fresh gold is increasingly difficult to find, even to "replace" the ounces that are dug out each year by miners. The public facts that are easily available from stock markets point in a very different direction. There are, as a sampling, some 30 listed gold stocks that are begging for 414m ounces of discovered gold to be mined. This number is conservative; it refers only to each stock's primary gold interest.

It seems that two key, and related, factors rule the roost. First, capital expenditure, both stay-in-business and virgin, has risen to high levels, based on structural realities, mainly the ever-rising cost of raw materials, energy and skills. Barrick, the world's biggest gold miner, recently announced that studies at Chile's Cerro Casale indicate pre-production capital at around USD 4.2bn, on a 100% basis (Kinross owns 25% of the project). Given the green light for a build, Barrick's 75% share of average annual production is anticipated at about 625,000 ounces of gold and about 180m pounds of copper.

Second, gold miners, under the whip from rising costs, and despite dollar gold bullion prices that have risen for eight successive years, are battling to produce convincing free cash flow. Over the past three calendar years, the world's ten major gold miners have produced free cash flow (operating cash flow, less capital expenditure) of negative USD 2bn, which can be compared to a positive USD 8bn from a single company, Freeport-McMoRan, which operates the world's biggest gold mine, but also ranks as global No 2 in copper and No 1 in molybdenum.

A further issue is that few of the world's biggest gold deposits are operated optimally. The biggest, and a special case, the Witwatersrand, is well beyond maturity, with production that peaked in 1970 at 1,000 tonnes of gold; output this year is set to be around 200 tonnes.

Looking at the nine biggest gold deposits after the Witwatersrand, there is Muruntau (which also contains silver), which is State-owned and run, and operates well below optimum levels. Grasberg runs at optimum levels, and is primarily copper, owned mainly by Freeport-McMoRan); then there is Olympic Dam (developing, primarily copper and uranium, BHP Billiton), Pebble (undeveloped; copper, Northern Dynasty, and Anglo American), Natalka (Polyus), Sukhoi Log (Polyus, perhaps), Oyu Tolgoi (under early build, copper, Ivanhoe Mines, and Rio Tinto), Reko Diq (undeveloped, copper, Barrick, 37.5%, and 37.5% copper major Antofagasta), and Lihir, which runs optimally.

The Witwatersrand aside, global gold production would rise materially, and for many decades, if all these huge deposits were mined optimally. The challenges range from obstacles by way of political impediments, to environmental challenges, but, once again, capital expenditure challenges, combined with the relative difficulty that operating gold miners find in generating free cash, is limiting the full optimal operation (if any) of these huge deposits, and at the same time, is limiting corporate activity by primary gold miners.

At the same time, gold miners are increasingly attracted to copper porphyries, which often contain attractive quantities of gold metal. Acquisitions in the gold area are tending to focus on copper porphyries, and also strategic targets. In the past while, Brett Resources has come under bid from Osisko, busy building the Malarctic mine in Canada; Underworld Resources is wanted by Kinross, and Agnico-Eagle has acquired the shares it does not already own in Comaplex, which has a market value of CAD 732m.

The asset focus for Agnico-Eagle is the Meliadine gold project in Nunavut, Canada, about 300km from Agnico-Eagle's producing Meadowbank gold mine. In February Goldcorp spent hundreds of millions of dollar acquiring Goldplat, for the Camino Rojo project near Goldcorp's Peñasquito mine, in full build, in Mexico.

Barrick and Goldcorp are in court over Chile's El Morro, which, in the hands of London-listed Xstrata, was classified as a copper-gold deposit. In October 2009, Barrick announced that it had bought 70% of the El Morro project for USD 465m in cash; in January 2010, Canada-listed New Gold, holding 30% of El Morro, said that it had exercised a right of first refusal on El Morro, and Goldcorp said it had acquired the 70% stake in El Morro that Barrick had bought.

When big gold companies wage wars over copper-gold deposits, times are busy changing. What all this seems to mean in practice is that big established gold miners will increasingly lean towards polymetallic projects and mines, especially involving copper, and that listed gold stocks with piles of gold-only in the ground will become less attractive, unless there is strategic value to be had.