Dec '11/Jan '12

Gold

Gilded thrill ride

By D. Zlotnikov

While the story for so many commodity minerals is all about China, the gold market is focused on Europe. As worries of sovereign debt in the Eurozone remain, investors seeking a way to preserve their wealth are continuing to push up demand for the precious metal. In these times of financial uncertainty, gold has become a de facto currency, says Patricia Mohr, vice-president, economics, and commodity market specialist at Scotiabank. “In recent years, gold has been monetized because of the weakness of the world’s two key reserve currencies – the U.S. dollar and the Euro – and so investors have lost faith in paper currencies and turned to gold as an asset to maintain and store value,” she says.

But turn the heat up too far, adds Mohr, and investors start turning away from the metal. “In times of extreme risk aversion, as we had in early October,” she explains, “investors still tend to shift into the security of U.S. Treasury securities — a very big, liquid market that is backed by the government.”

According to Mohr, much depends on a lessening of broader credit concerns in Europe. If the more solvent Eurozone countries convince the markets of the Euro’s stability, she expects gold to remain relatively flat through 2012. Of course, if the markets are unconvinced, gold may go higher still. She also points out that the gold price remains highly volatile, as speculators sell off the metal after each price jump, which causes it to drop again – although few expect gold to drop significantly in the short term.

Advancing to production

New and existing gold producers are seeking to capitalize on the opportunity and projects are underway across Canada. Mid-tier producer New Gold Inc. is expecting its New Afton gold-copper project in British Columbia to begin commercial production next summer, with 85,000 ounces of gold produced annually.

Among the majors, Goldcorp has just had its position as the country’s premier producer reaffirmed by the Quebec government’s approval of construction plans at the Éléonore project. Slated for completion in 2014, Éléonore will yield approximately 600,000 ounces annually. Goldcorp’s other Canadian project – Cochenour in Ontario – is also due to come on stream in 2014, at a production rate of about 275,000 ounces. Nearly half of Goldcorp’s 2.5 million ounces last year came from Canada.

The exploration conundrum

Despite the strong investor interest and Canada’s many advantages as a mining and resource powerhouse, the long process of developing a project is challenging, to say the least. Dave Webb, president and CEO of gold junior Tyhee Gold Corp., says there is an outsized amount of risk in developing projects. Tyhee is currently in the feasibility study stage at its Yellowknife project in the Northwest Territories. “We initially applied for our operating permits in 2005 – that was after doing two years of baseline studies,” he says. The process was restarted after the project changed in scope, in part because of rising gold prices. Those changes required that the original application be withdrawn, and a new application was filed in 2008. The company was referred to the environmental assessment review board and filed its environmental assessment report in the summer of 2010. The technical review stage began in May 2011. “We expect that to last through mid-2012, but there is no fixed end date – it’s an open-ended process,” says Webb.

He also points out that demand for gold has driven up the cost of cyanide, which has tripled in the last year. Establishing numbers for engineering studies is an industry-wide problem.

But, topping the list is the issue of regulations, which Webb feels is keeping parts of Canada from benefiting from their vast mineral wealth. “If you wanted to put a four-person camp on the edge of a lake, access it by float plane and drill a 50-foot hole into a swamp to test a potential of gold showing, you may have to file a full environment assessment, which is a multi-million dollar undertaking,” he says. “The trigger is set far too low.”

Why push on in the face of such challenges, especially when other jurisdictions are more welcoming? “We’re working in an area where we have near exclusive access to most of the Northwest Territories and very, very limited competition by even the majors,” Webb responds. “We’re sampling on a past-producing gold mine and a new discovery we call Area 52, because that’s what the assay was – 52 grams per tonne. We’re sitting there in the playground and there’s no kids looking in.”

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