For Junior Gold's... it Comes Down to "RESERVE REPLACEMENT" ...

If you haven't noticed... it was the top Junior Mining/Exploration companies that booked the best stock appreciation gains out of all sectors in the entire stock market last year...

One of the top fundamental reasons why Junior Gold Exploration/Mining companies have started posting extra-ordinary gains is a trend that is really just starting to exert it's influence, and that trend is called: "RESERVE REPLACEMENT".

"RESERVE REPLACEMENT" is a term that generally summarizes the need of a large Gold company to replace it's in-ground Gold reserve in order to maintain it's revenue stream... this is because all mines have a finite supply of Gold, meaning; ALL MINES EVENTUALLY RUN DRY.

THE REASON "RESERVE REPLACEMENT" IS OF SUCH IMPORTANCE IS;
THE STOCK MARKET VALUATIONS OF LARGE CAP. GOLD COMPANIES DEPEND UPON IT.

And the importance of  "Reserve Replacement" to large cap. Gold companies is literally now growing by the month... as recent trends in the Gold industry are exerting their influence on the sector with more and more relevance.

You see, if a large cap. Gold company doesn't have a good future supply of in-ground Gold secured for future production; THERE IS NO SOUND REASON FOR AN INVESTOR (PARTICULARLY AN INSTITUTIONAL INVESTOR) TO BE INVESTED IN A LARGE CAP. GOLD COMPANY FOR THE LONG-TERM... you see, unlike virtually all other manufacturing industries, the large cap. Gold companies can't manufacture their product (Gold) out of virtually thin-air or out of a combination of other raw materials at will.

"Reserve Replacement"  is becoming an increasing serious problem facing large Gold companies because of several issues, one of which is; the very long time it now takes to bring a mine to production... because of increasingly stringent environmental & social issues, combined with more Govt. regulations than ever before, it can now take several years or more to bring a mine to production... so the danger to a large cap. Gold company is; if they allow their in-ground Gold reserve to dwindle down to low, they run the very serious risk of revenue disruption, which can seriously damage their stock valuation, and with their stock valuations now at new multi-year highs, fluctuations of just 10 or 20 percent can mean the loss of billions of dollars in market capitalization.

There are several very important trends playing out right now that are just starting to bring the issue of reserve replacement more and more to the forefront... several of these trends include;

• The trend of increasing Gold consumption.



• The trend of decreasing Gold production (see chart below).



• The fact that Gold reserves can't be manufactured out of thin air at will... mine approvals are taking longer than ever before, while mine output is decreasing, and Gold consumption is increasing
.


• The time-cycle for reserve replacement is getting shorter & shorter as increased Gold demand strips the existing reserves quicker & quicker.



• Large Cap. Gold companies will become increasingly dependent upon a proven strong supply of in-ground Gold reserves to reliably grow their revenue and market capitalizations in order to attract & keep long-term capital investment.

The following chart is extremely important in relation to reserve replacement... in this chart you can clearly see the yearly trend of DECREASING Gold mine output... since the beginning of approximately 2001 total newly mined Gold output has started a very noticeable decline...

Chart Source: World Gold Council
Also significant in this chart is; South Africa, which use to be the largest producer in the world by a very wide margin, has been in a serious production decline for about a decade... and now other big Gold producing countries are starting to face similar production declines.

So... while you can clearly see from the chart above that yearly mined Gold output peaked and has been declining since approximately 2001... overall demand for Gold continues to stay exceptionally strong, having increased for the past seven consecutive quarters in total tonnage demand, with double-digit demand in growth coming from countries that are also the largest consumers of Gold; India and China... in additional to very strong demand growth from Saudi Arabia, Dubai, and other Middle Eastern and Asian countries.... now, are you starting to get the picture of why I'm starting to pound the table about how important "Reserve Replacement" will become shortly.

There are also trends that are now simply making reserve replacement PLAIN DIFFICULT, some of these trends include;

• The fact that environmental & social standards are much higher than 1 or 2 decades ago... there are now currently more Govt. regulations than ever before, making mine permitting slower than ever before.



• The fact that most of the easy-to-reach Gold has already been mined... and the remaining supply is more & more expensive/difficult to mine

This presentation from the New York Times indirectly provides a very good example of how much stricter environmental & social standards have become pertaining to Gold mining, which ultimately now add to the complications and importance of reserve replacement. The New York Times presentation also indirectly shows some of the new technologies & equipment that have over the past 1 - 2 decades allowed the rapid extraction of Gold (at a pace of extraction much faster than the technologies of the 18th and 19th centuries allowed) which has further contributed to the increasing rarity of Gold and the growing importance of reserve replacement.

As an investor... to capitalize on the growing pressures of reserve replacement, you need to be invested in the right Jr. Gold mining/exploration companies... this isn't easy because unfortunately there are hundreds of Jr. Gold exploration companies, and many of these companies will not have land that contains enough Gold to feasibly be of interest to the large cap. Gold company... so you need to pick your investments carefully... also, when evaluating Jr. companies, there are certain geo-graphical area's that have historically proven to produce new discoveries of high grade Gold mines, a couple of these area's are the Red Lake area in Canada, and the Carlin Trend in Nevada... mines in North America also carry less political risk than say, certain area's of Africa & recently countries like Bolivia... also, the North American mines also generally have much better access to infrastructure than many other countries. 

Here is another recent article that speaks about the VERY IMPORTANT DEVELOPING TREND of reserve replacement and it's growing significance... the article also names specific deals where large cap. have recently made acquisitions of Jr. Gold Exploration/Miners.