STRAIGHT TALK ON MINING
Who Wants to be a Billionaire?
Dr. Keith M Barron
November 9, 2004.
"Like gold, U.S. dollars
have value only to the extent that they are strictly limited
in supply. But the U.S. government has a technology, called a
printing press (or, today, its electronic equivalent), that allows
it to produce as many U.S. dollars as it wishes at essentially
no cost. By increasing the number of U.S. dollars in circulation,
or even by credibly threatening to do so, the U.S. government
can also reduce the value of a dollar in terms of goods and services.
We conclude that, under a paper-money system, a determined government
can always generate higher spending and hence positive inflation.
Of course, the U.S. government is not going to print money and
distribute it willy-nilly..."
Ben S. Bernanke, Federal
Reserve Board Governor
November 21, 2002.
When I originally read this
two years ago, I had to read it through twice... I couldn't believe
it. Like many of you readers I saw all this coming. Look at my
Straight Talk #3: Applying the Paddles to the US Economy
from September 29, 2001 [click].
When the economy is in trouble, inflating the money supply is
the path-of-least-resistance. You can toss money around and make
everything seem okay - for the short term anyway. Now that George
W. Bush has secured the presidency for the next four years, we
all know that once his term ends, the problems both domestic
and international he has faced will no longer be his responsibility
and will be handed on to the next guy. Democracy is a great thing,
but in the U.S. of A., pending elections can be enormously distracting,
and more and more of a president's term seems to be consumed
by stumping for votes rather than governing.
When deflation threatens and
you don't respond by massive inflationary spending, the voters
can and will hand you your head. President Grover Cleveland,
faced with the fallout from the Bank Panic of 1893 stuck to his
guns and refused the reinstatement of the mildly inflationary
Sherman Silver Purchase Act. He believed in the sanctity of the
Gold Standard, though he became enormously unpopular for it.
The result of the 1894 mid-term election is unprecedented in
history: the Democrats lost 113 seats in Congress. In the northeast,
the Democratic congressional contingent was reduced from 88 to
9, and in 24 states the party no longer had congressional representation
at all. (At the Democratic National Convention in 1896, Williams
Jennings Bryan in an about-face would deliver his famous "Cross
of Gold" speech... more about that in a future Straight
Talk). In the Great Depression election of 1932, incumbent
Herbert Hoover was soundly trounced by Franklin Roosevelt, winning
the electoral votes of only 6 states.
When Bush took office he was
given the near impossible task of forestalling the unraveling
of the Greatest Equity Bubble of All Time. It was done by tax
breaks and lowering the Fed Fund rate to almost zilch to spark
a housing boom. Then, with the housing market running away, first
as a safe-haven to the stock market, and soon thereafter as speculator
heaven, those good little (but tapped-out) consumers took out
home equity loans and splurged on SUV's and continued the party.
Meanwhile, Fed Chairman Alan Greenspan stuck his head in the
sand and stated publicly that there was no housing bubble
and that the surge was "due to immigrant purchases."
George was also fighting a war on two fronts: one domestic and
two in Asia. I remember walking through Immigration at Miami
International Airport and seeing new computer terminals stacked
floor-to-ceiling that would collect information for the new Office
of Homeland Security. Call me a cynic, but it's easier to inject
cash into the economy in the guise of war-spending than it is
to push tax breaks through Congress.
Sure, you can't print money
and distribute it willy-nilly...
"By coordinating with
fiscal policy, the Fed could even implement what is essentially
the classic textbook policy of dropping freshly printed money
from a helicopter. In this case, the Fed would monetize government
debt that had been issued to finance a tax cut."
Evan F. Koenig Vice-President,
Jim Dolmas, Senior Economist, Research Department, Federal Reserve
Bank of Dallas
Take a look at the weblink.
I love the graphic of the Chinook helicopter!
The twin elephants in the
room that were not discussed in this election campaign are
the trade imbalance and the budget deficit. Neither can be reduced
to a sound-bite discussion or will fit in the 2 minute response
time of the television debates. No candidate wanted to open that
tin of worms, however, foreigners sure understand what's going
Headlines, Friday, November
Dollar Falls to Record Low
NEW YORK (Reuters) - The euro
hit a record high against the dollar above $1.2927 on Friday
as the beleaguered U.S. currency weakened across the board in
technically driven trading.
The dollar's bounce from strong
U.S. employment data earlier in the session proved fleeting,
as dealers, concerned about record U.S. trade and budget deficits,
saw an opportunity to sell it lower again.
This involved buying euros
en masse, taking out options barriers around $1.2900, and then
at the previous all-time high of $1.2927.
The euro climbed above the
high of $1.2927 hit on Feb. 18, touching a record peak around
$1.2935, according to Reuters data.
Global policy-makers have recently
appeared fairly tolerant of the dollar's decline, and their laissez-faire
attitude has encouraged investors to continue selling the U.S.
currency. Some Federal Reserve officials recently signaled that
the dollar would have to fall if the U.S. trade gap remains wide.
Aye, there's the rub. The trade
imbalance. Could it be possible that the U.S. is letting the
dollar slide to make U.S. exports cheaper? Hmmmmm. It WAS discussed
in that Dallas Fed paper above. Tricky business this. With the
housing market topped out, and the lowest U.S. interest rates
since 1958 failing to spark the Greatest Boom of All Time. What
does one do next? Add in one more ingredient to the mix:
"Today, despite its recent
surge, the average price of crude oil in real terms is still
only three-fifths of the price peak of February 1981. Moreover,
the impact of the current surge in oil prices, though noticeable,
is likely to prove less consequential to economic growth and
inflation than in the 1970s."
Chairman Alan Greenspan,
Federal Reserve Board
October 15, 2004.
How many times have you heard
this apology - "well it's not really as bad as all that."
Isn't it a little bit disingenuous to believe that higher oil
prices are not going to translate into higher prices - for everything?
With an economy already enormously strained by corporate and
personal debt, spending deficits, and trade imbalances, and continuing
to be pummeled by high fuel and commodity prices (steel, for
instance), how many straws does it take to break this camel's
back? Is it any coincidence that gold is at a 16-year high against
Being a Billionaire is not
all it's cracked up to be:
Lessons from History
I love studying history. Not
only do I find it enormously satisfying and entertaining, but
it can also be enormously instructive, for, as Ambrose Bierce
"There is nothing new
under the Sun, but there are lots of old things we don't know."
These two bank notes were issued
during the infamous German Weimar Hyperinflation. The top is
dated November 1, 1923. The bottom is dated November 5, 1923
(perhaps the plates were changed days later to a new design to
instill confidence? It didn't work!). The coin is a gold 20 German
Mark piece from 1902, slightly smaller than a U.S. Quarter. In
1923, this gold coin was worth ten times the value of these two
combined bank notes. That's right. By the way, 1000 milliarden
= 1,000,000,000,000, and so this little 20 Mark coin was equal
to 20,000,000,000,000 of the paper Marks. The Mark was tod
by the 20th November, when 12 zeros were arbitrarily lopped
off the end and it became the Rentenmark. On the day that the
Mark was extinguished the above notes together were equal to
just US 46¢. If you want to show your children what inflation
is all about, just print this out and show them the Exhibits
A, B and C above. I know that over 95% of planet Earth it would
take me about 5 minutes to convert that 100-year old coin into
local currency for a steak dinner and a nice bottle of wine.
The paper money is only valuable to a collector of arcana like
Here are some almost-not-to-be-believed
extremes of the German Weimar Inflation:
"Petty crime, the crime
of desperation, was flourishing. Pilfering had of course been
rife since the war, but now it began to occur on a larger, commercial
scale. Metal plaques on national monuments had to be removed
for safe-keeping. The brass bell plates were stolen from the
front doors of the British Embassy in Berlin, part of a systematic
campaign unpreventable by the police even in the Wilhelmstrasse
and Unter den Linden. Over most of Germany the lead was beginning
to disappear from roofs. Petrol was siphoned from the tanks of
motor cars. Barter was already a usual form of exchange; but
now commodities such as brass and fuel were becoming the currency
of ordinary purchase and payment. A cinema seat cost a lump of
coal. With a bottle of paraffin one might buy a shirt; with the
shirt, the potatoes needed by one's family."
When Money Dies: The Nightmare of the Weimar Collapse
"In 1923, there were engaged
on the production of notes for the Reichsbank... 1,783 machines...
(E)ven with assistance on so vast a scale the Bank was not in
a position to supply the business world with a sufficiency of
German Monetary History
in the First Half of the Twentieth Century
Robert L. Hetzel
You see, the money was depreciating
so fast against common goods that entire print runs of notes
were insufficient to satisfy demand for even a few hours.
I have another little pamphlet
that many readers may be familiar with: Fiat Money Inflation
in France: How it Came, What it Brought, and How it Ended,
by Andrew Dickson White. This discusses the currency experiment
by the revolutionaries of the fledgling French Republic in 1790,
which beggared the nation, fostered the Reign of Terror and ultimately
brought Napoleon to power. The notes, known as Assignats
were first printed in large denominations, but ultimately became
the sole currency as all coinage was hoarded away. It took France
40 years to recover from the Assignat inflation. The numbers
sound pretty small by today's reckoning, but clearly horrified
White, writing in 1912:
"Notwithstanding the fact
that the paper currency issued was the direct obligation of the
State, that much of it was interest bearing, and that all of
it was secured upon the finest real estate of France, and that
penalties in the way of fines, imprisonments, and death were
enacted from time to time to maintain its circulation in value
until it reached zero point and culminated in repudiation. The
aggregate of the issues amounting to no less than the enormous
and unthinkable sum of $9,500,000,000, and in the middle of 1797
when public repudiation took place, there was no less than $4,200,000,000
in face value of assignats and mandats outstanding;
the loss, as always, falling upon the poor and the ignorant."
The people responsible for
putting France on the slippery slope of inflation - soon to mutate
into hyperinflation - were clearly no dummies:
"It would be a mistake
to suppose that the National Assembly, which discussed this matter
[introduction of paper money], was composed of mere wild revolutionaries;
no inference could be more wide of the fact. Whatever may have
been the character of the men who legislated for France afterward,
no thoughtful student of history can deny, despite all the arguments
and sneers of reactionary statesmen and historians, that few
more keen-sighted legislative bodies ever met than this first
French Constitutional Assembly. In it were such men as Sieyès,
Bailly, Necker, Mirabeau, Talleyrand, Dupont de Nemours and a
multitude of others who, in various sciences and in the political
world, had already shown and were destined afterwards to show
themselves among the strongest and shrewdest men that Europe
has yet seen."
The inflating ended at 9 o'clock
in the morning, 18th February, 1796, in the Place Vendome of
Paris where the presses and paper to print Assignats were
burned and the engraving plates smashed to bits with hammers
in front of thousands of spectators.
When Bonaparte took the Consulship,
at his first cabinet meeting he stated, "I will pay cash
or pay nothing." ("cash" meant gold).
It would be incredibly arrogant
for any nation state to suppose itself permanently inoculated
from hyperinflation. To do so would be hubris of the highest
order - each time it has happened it began as a well-intentioned
temporary inflating of the currency. Before saying that, "It
couldn't happen here," here's a partial list of countries
that fell prey to hyperinflation in the last century: Hungary,
Romania, Russia, Iraq, Italy, Yugoslavia, France, Germany, China,
Vietnam, Mozambique, Ecuador, Peru, Croatia, Mexico, Venezuela,
Turkey, Uruguay, Argentina, Brazil, Bolivia, Poland, Zaire, Austria,
Understanding Drill Assays: Part 1
Pretty much every week I get
shown some assays and asked on the spot if they are "any
good." Is there a quickie way of telling? Is there a "Drill
Core Assays for Dummies" Handbook?
The short answer is "No."
It can be very hard to interpret drill hole results outside of
any context - even for a career geologist.
So, how would an investor who
is not a geologist or a geological engineer be able to tell if
results are any good... is it a "buy" signal? A "sell"?
A "hold"? Suppose it is the only information out there?
Such things can be tough to decide, but I've boiled it down to
a few guidelines.
Firstly, something that may
sound rather obvious - if you aren't already fully comfortable
with the metric system, take time to learn it. If you don't know
what a metre is you're setting yourself up for disaster. Any
dictionary or encyclopedia should be able to give you conversion
tables for weights and measures. The overwhelming majority of
mining and exploration companies listed on the ASX, JSE, TSX,
or AIM give assay values in grams per tonne and measure drill
core lengths in metres.
Continuity and Geological Models
To make sense of press releases
you have to navigate your way around the jargon we geologists
use. Before any drilling takes place the geologist should always
have an idea of which way the mineralization is trending. Geologists
will often refer to the "strike" of the mineralized
rock (you can think of it as "direction trend"), and
the "dip" (which way the mineralization is tilted or
inclined). As important as the metal content or "grade";
is demonstrating continuity - does the mineralization extend
to depth and along the strike? You can't "build tonnage"
(incrementally increase the size of the mineralization through
discovery) if you don't have continuity. So the geologist will
try to hit the buried mineralization with drill holes both along
the trend, and at increasingly deeper levels. Sometimes
geologists will use early information to drill "step out"
holes, to test for continuity some distance away from earlier
drill holes. They're called step-out holes because they step
away or jump some distance from the known to the unknown (sometimes
these step-outs are a very real "leap of faith"!).
A positive result from a step out hole will often make the share
price rapidly move because it's a way to quickly demonstrate
size potential. If a step-out hole is successful, the geologist
might want to track back in the opposite direction with "in-fill"
The geologist will also want to know how thick the mineralization
is, and the best way to do that is to try to intersect it underground
at right angles in drilling. A perfect right angle intersection
will give you a "true thickness." If you hit it at
any other angle the mineralization will appear wider in the drill
hole than it actually is in nature. This is a function of geometry.
With a couple of drill holes at different inclinations you can
use trigonometry and figure out the thickness (yes, High School
Trig is important... tell your kids!) What any competent geologist
will try to avoid is "drilling down the dip." You can
think of it this way: take any hardbound book and pretend that
the closed book is an ore-bearing geological unit. Prop up one
end so that the cover is inclined. Now take a pencil and rest
the tip on the inclined cover. Orient the pencil so that it sticks
straight up out of the cover at an angle of 90 degrees. That's
the best angle you should use if you were going to "drill"
your book. A hole at this orientation is going to give you an
accurate representation of the book thickness. However if you
drilled through and down the spine of the book between the covers
that's like drilling down dip and will give you a false impression
of thickness. Sometimes it can be tricky to figure the dip of
mineralization, and it can often take a couple of cracks at it,
drilling from different angles, to begin to sort it out. If a
Company has been drilling narrow high grade veins and suddenly
comes up with an extremely wide vein intersection, always be
a bit skeptical and ask yourself if they may have drilled "down
The geologist should also have
a fair idea of a geological model. He may not have it completely
understood at first pass but he or she should have it down to
a few possibilities. This is one of the most important considerations
in whether or not mineralization has the potential to eventually
be "proved up" into an economic orebody. Let's say
that we're drilling a gold-bearing quartz vein, which is "shallow"
(near the surface). It might be possible to eventually mine that
vein with a small open pit from surface. If it's rich enough,
it might pay you to afterwards go underground and sink a shaft
to mine it from the subsurface. But if the vein is narrow and
low grade, and only starts a couple of hundred metres down and
not from surface, mining it will probably never be a paying proposition.
Some quartz veins however can be very rich, and will support
economic mining to very great depths. Let's say you have a second
orebody which is a vuggy silica unit (vuggy silica is very hard
and porous quartz which has formed by replacing pre-existing
rock, often by very acidic hotspring waters). The vuggy silica
may be low grade, say 1 or 2 grams/tonne in gold and possibly
50 or even a hundred metres thick. Vuggy silica is usually a
shallow mineralization type, and at those grades, if there is
a considerable thickness, it can be very lucrative to mine it
using open pit methods.
High grade has always moved
markets, but today, in 2004, many mining people have noticed
a trend in North America towards rewarding companies that come
up with high grade numbers and paying less attention to anything
else. My own personal "take" on this is that investors
have been spoiled by the grades that have come out of Goldcorp's
Red Lake Mine. Many of the investors who were around in the early
1990's during the last junior mining boom were permanently shaken
out by the triple whammy of the Bre-X scandal, low gold prices,
and expansion of the internet bubble which siphoned away venture
capital (much of which historically went into junior mining).
Over the last several years Bob McEwen has done a splendid job
of promotion, giving the Red Lake Mine a high profile (even advertising
on the radio!) so that many of the new crop of investors around
today may falsely believe that all profitable gold mines have
to have super high grade. The Red Lake mine has so much gold
in some areas that visible gold can actually be mapped underground!
You can draw a chalk line around the visible gold and enclose
a sizable area. Proven and probable resources as of Dec 31, 2003
were 3.178 million tons at a grade of 1.23 oz/ton [42.17 g/t]
gold for 4.939 million contained ounces. I was underground in
1987 when the mine was called the Dickinson, and was privileged
to see such extreme high grade, which the miners explained to
me they got into only twice or so a year. The miners call such
places "jewel boxes." I saw a drill bit clogged with
gold, and two muckers horsing around trying to kick a piece of
high grade down the drift (tunnel) with their steel-toed boots
that was so heavy with gold it was reluctant to easily budge.
Unless I get invited to go underground there again I don't expect
to see such high grade gold soon, if ever. I want to stress again,
grades like these are pretty rare and the new discoveries over
the next few years are not going to look like this.
You have to realize that the
majority of highly profitable mining operations mine much lower
average grades, and that many operating mines don't have any
"bonanza" grades like the example above. In fact, there
are a number of senior mining companies that shy away altogether
from high grade vein deposits. They may represent highly profitable
low cost ounces but they typically represent a small number of
contained ounces, say less than 1 million gold ounces
- Red Lake is highly unusual. Many of the big Senior Gold Producers
are trying to grow their reserves and want to do it in one foul
swoop through finding a low grade but high tonnage and high number
contained ounces deposit - like Barrick Gold has done with Pascua
Lama (almost 300 million tons containing 16.862 million proven
& probable gold ounces at a grade of 0.057 oz/ton [1.95 g/t],
as of December 31, 2003).
Exploration success doesn't come easily and so most Senior Companies
can only grow or even keep their reserve numbers level through
mergers and acquisitions - witness the Harmony - Norilsk - Gold
Fields - IAMGOLD bun fight currently in progress. High grade
vein deposits are also very drill intensive (need to be
very intensively [and expensively] drilled to accurately forecast
the grade and tonnage), and the grade in veins can be erratic
and veins themselves difficult to follow underground. Many Senior
Miners want deposits that their engineers can plan for 5, 10
or even 20 years production, and they want to boast to fund managers
that their reserve profile has been boosted by 3 or 5 million
ounces. These big senior producers are looking to grow their
ounces and are looking 5 or 10 years outboard. Meridian Gold
took it on the chin recently from investors who didn't like how
much money was being spent on exploration, but if you're going
to find those low cost ounces, as Meridian has a track-record
of doing - it gets pretty spendy.
Low grade big tonnage versus
high grade low tonnage - both are important and both potentially
highly valuable. As a rule-of-thumb many geos look at gram-metres
as to whether or not a drill result is interesting. Simply put,
this is the grade multiplied by the width. A vein
that is 5 metres wide and averages 60 g/t will represent 300
gram-metres, but so will a zone that is of lower grade, say 100
metres wide, grading 3 g/t. It of course would depend on the
geological context as to which is the more interesting drill
hole, but any exploration manager would be ecstatic to receive
either result! An intersection of 10 gram-metres may or may not
make it. An intersection of 50 gram-metres is pretty good; of
100 or 200 gram-metres is pretty gosh darn good, and anything
higher becomes exceptional.
Minimum Mining Widths - Stretching
Fourteen years ago I received
a spectacular assay of 800 g/t gold for a quartz vein I examined
in Kirkland Lake, Ontario. The Vice-President of the company
I worked for got busy the day the results were in, working out
"if we average the grade out over 2 metres, we get x, and
if we average over 3 metres we get y, and if we average it to
5 metres we get z." Us guys in the field kind of rolled
our eyes at this, because we knew that the vein was only 28 centimetres
wide and that there was no gold in the wallrock (walls of the
vein). He was "stretching the interval." Now,
there's nothing wrong with someone "in house" making
a few idle calculations. If you were to average the grade over
3 metres, assuming the wallrocks contained zero gold, you'd get
75 g/t gold over 3 metres, which is a pretty respectable number.
However you'd be honour bound if not legally obligated to disclose
in a press release that the gold occurs only over 0.28 metres
There's a lot of gray area
here, and there are a couple of things to consider. Firstly,
a minimum mining width. This is the minimum width in which
miners and machinery can safely work and is often legally mandated
in a lot of jurisdictions by government Occupational Health and
Safety folks, or by unions. Narrow mine workings can be difficult
to get around which makes them unsafe in an emergency situation.
In the old days, "rat holing" on the vein was a common
practice. In a modern mining scenario it is not possible now,
though it is common in places like South America, Mexico and
China in artesanal mines. The thing to note here is dilution
of grade from wall rock. In a modern mining scenario you
have to take the minimum mining width - guts feathers and all,
and can't selectively mine narrow veins. Taking the barren wallrock
is what is called "dilution." In the above scenario
it might be justifiable to stretch the interval to a minimum
mining width of say 2 metres or so - but never to 5 metres.
The general industry practice
is that assay intervals have to carry their own weight.
This means that when you are calculating a weighted average amount
of gold over a certain width you shouldn't be including long
sections of rock that is very low grade or barren in your calculation.
It is however totally appropriate to include small sections in
the width if the width represents one geological unit - say one
big wide quartz vein with a couple of short sections here and
there containing no or very low gold content. In a mining scenario
you'd never leave these short sections behind as waste rock in
any case, and you'd take the whole vein. This sounds a bit complicated
and there is considerable latitude given to mining professionals
when reporting grades and widths, but you should also be aware
that this reporting can be open to abuse. When reporting drill
intersections it's good practice for a company to also report
their highest individual assay alongside. Some companies even
publish all the assays in table format - that way investors get
the whole picture.
In Part 2, I'll discuss the Nugget Effect, Cutting Assays and
Stripping Ratios - more geo jargon you need to understand.
I welcome you to visit the
Straight Talk on Mining Website at http://www.Straighttalkonmining.com
All the old commentaries are
there for your viewing pleasure. There's lots of good stuff.
Send your E-mail address and we'll put you on our mailing list
and alert you of new Straight Talks.
November 6, 2004.
© 2004 Keith M. Barron Ph.D.
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