Per unit cost/price of gold
As we saw last week, despite Guyana’s long historical association with gold discovery and exploration it is ironic to name as an upside potential/achievement that is facing the economy over the near-to-medium term, the prospects of large-scale gold production coming on-stream by 2014. I had mentioned in last week’s article the crucial roles of advances in techniques in gold discovery, exploration, recovery and processing methods in this outcome. Additionally, I had also drawn attention to similar innovations in the financing of gold mining operations and the marketing of gold. All these considerations have the effect of lowering per unit cost.
Accompanying this potential for lowering per unit cost, gold mining is now being presented with excellent prices on the world market. At the beginning of the 2000s the annual average world price per ounce of gold was about US$280. By 2005 this had raised to US$445 ― an increase of about 45 per cent. The spot price for gold reached over US$1,000 by 2010, and averaged US$1,225 for that year, as the global crisis peaked in 2009-2010. Recently the spot price has reached US$1,560+.
While these rapid increases in the price of gold reflect market forces (demand and supply) readers should note that much of the current demand for gold is being fuelled by the financial uncertainties arising from the global crisis. Weak national policies have resulted in swings in the prices of key currencies (US dollar, euro, Japanese yen, British pound, Chinese yuan and the Canadian dollar) precipitating a flight to what investors see as ‘quality,’ which they find in precious metals, particularly gold. As the global crisis fades and recovery advances one can safely expect a significant diminution in the influence of these precautionary and speculative motives in the demand for gold on world markets. This will clearly temper future increases in the price of gold.
Finally, it is worth noting that the company which I referred to last week, Guyana Goldfields Inc, has been selling off some of its gold properties, which it has described as “non-core assets.” This is no doubt intended to increase the firm’s access to financial resources over the short-term.
Manganese production
The third upside potential, which I would refer to, is the likely large-scale commercial production of manganese over the short-to-medium term. The company at the forefront of the exploration and development of manganese production in Guyana is Reunion Manganese Inc. This is a wholly-owned subsidiary of Canada-based Reunion Gold Corporation. The company has four prospecting licences (PLs) covering a total of 45,729 acres. The PLs were granted in September 2010 for an initial period of 3 years. These may be renewed for two additional periods of one year each.
The company specializes in operations in the Guyana Shield region of South America, where it has built up an enviable expertise. At the end of last December, the company’s outstanding shares were valued at approximately US$105 million. The licensed area of 45,729 acres of manganese prospects, which the company holds is around the Matthews Ridge area.
Some readers might be aware that, about half-a-century ago, Guyana produced manganese on a commercial scale in the Matthews Ridge area. That mining operation operated as a subsidiary of the well-known Union Carbide Corporation during the years 1962-68. It had produced then around 1.7 million tonnes of manganese concentrate (37 per cent).
The termination of this mining operation has been attributed to two major factors. One of these was that given the prices then prevailing and technology available profit margins were not enough to incentivize continued production. The other factor given by the analysts is “political uncertainty.”
Subsequent to the termination of production, the Guyana Geology and Mines Commission (GGMC) along with the then Peoples Republic of Korea (DPRK) had undertaken a joint evaluation of potential recoverable manganese concentrate in the area. Their estimate was 3.4 million tonnes of recoverable concentrate. This was distributed as follows 1) 2.6 million tonnes of 33.4% manganese concentrate at Matthews Ridge 2) 0.84 million tonnes of 33.4% manganese concentrate at Pipiani and, 3) 0.1 metric tonnes of 33.4% manganese concentrate at the North Prospect.
Favourable factors
The company has two exceptionally strong factors working in its favour, which support the likely commercial success of its plans to produce manganese in Guyana. One is the consideration that while the historical estimates of resource availability can be invalidated down the line, at this stage of exploration enough evidence seems to have already been accumulated by the company for it to make a prudent decision to go forward with its plans.
The other is that if we use some approximations of this historical estimate as a baseline, then the company has to determine whether 1) future prices for manganese would generate profitable margins; 2) the technology it can access will reduce real operating costs below their historical level at the time of the previous company’s operations (1962-68); 3) the sunk costs left behind from the previous mining operations could contribute to the lowering of exploration and development costs; and 4) whether it had adequate access to the best in-country expertise in Guyana.
On all four counts documents from the company show favourable dispositions. The on-site sunk costs of the previous operation by Union Carbide are expected to lower infrastructural costs. Techniques for exploration, development, recovery and processing have advanced by leaps and bounds over the past half century. Indeed the company asserts that compared to the rest of the world, the barriers to commercial exploration of manganese at the particular site are low. Price trends are favourable for commodities (minerals) as the world recovers from the global crisis and global demand for raw materials increase. Finally, it appears as if the company has been aggressive in recruiting in-country expertise.
Next week I shall wrap up this discussion and then consider the fourth upside potential.
