BALTIMORE, MD - After gold prices fell to a 20-year low of $253.20 an ounce in 1999, three years of jagged underinvestment plagued worldwide mineral exploration efforts. Global exploration budgets dropped to a humble 12-year low of $780 million in 2002 spurring a significant drop in new large gold deposits found. But now a six-year rally in gold prices has producers scrambling to increase their reserve base.

There are two main ways for gold and mineral producers to grow. The first is to buy a prospective piece of land, then explore for, and delineate a reserve. While this way can be very economic for firms with highly experienced geologists, taking a property from exploration status to having a defined reserve can take upwards of ten years, or even more. This option also poses a significant risk as it is nearly impossible to predict where metal prices will be in a decade and production costs may outstrip profits.

A much faster and less risky - albeit much more expensive - way for a gold producer to grow is to merge with or acquire another. Many times acquisitions of mineral companies include immediate reserves and sometimes immediate production. And for today's gold producers that want rapid growth to take advantage of the current commodity bull, this is the best bet.

And that's exactly what many of the major mineral firms are doing today.

Producers Fuse Faster

Acquisitions and mergers within the mining industry have mushroomed to their highest level in a decade. And the sector may continue amalgamating in 2007 and beyond as producers struggle to find new high-grade deposits needed to grow reserves.

This year there were 357 fusing transactions throughout the entire gold sector - almost one a day - valued at a whopping total of $24.3 billion. This eclipsed the $16.2 billion spent in 2005 on 341 transactions and represented an impressive 50% increase since that time.

Some of these include, Goldcorp Inc.'s $8.5 billion acquisition of Glamis Gold Ltd., Freeport-McMoRan Copper & Gold Inc.'s acquirement of copper producer Phelps Dodge Corp. for $25.4 billion, and Kinross Gold Corp.'s, purchase of rival Bema Gold Corp. for $2.84 billion in stock to expand in Russia.

Now all these mergers may seem like a method just to boost profits. But the truth is producers are currently scrambling to boost their reserve base because mines are now being depleted faster than new reserves are being found.

Newmont Mining Corp., which spent $225 million to boost its stake in a mining project in Western Australia this year, cut its 2006 sales forecast by three times because of lower output in Ghana and Uzbekistan. The company said in September that its gold sales may fall 14% this year to 5.6 million ounces from 6.5 million in 2005.

And that's just the beginning.

Peak Gold?

Based on the United States Geological Survey's 2006 summary for gold, about 4.86 billion ounces of gold has been mined out of the ground since man first dug out those shiny yellow nuggets. But the USGS also estimates a remaining reserve base of only 2.88 billion ounces. So, from the point of view of peak being the halfway point of reserves, gold should have peaked at a remaining reserve base of 3.87 billion ounces (4.86 billion plus 2.88 billion divided by 2).

Now of course, estimating the amount of gold that has ever been mined and how much remains under the ground is an inexact science. We can, however, use recent production figures as a barometer.

According to Metals Economics Group, a recognized world leader in mining industry intelligence, the number of discoveries of at least 2.5 million ounces of gold has declined for eight straight years!

And get this . . .

From 1992 to 2005, the world produced a total of 1.1 billion ounces of gold. This was nearly 2% more than all the new resources that were discovered over the same time frame, further adding to the value of reserves.

In fact, the cost of gold reserves rose to a record $120 an ounce in 2005 - a 263.6% increase since 2000 when gold reserves were worth $33 an ounce.

And nowadays major gold producers don't seem to mind coughing up the extra bread.

Gold Fields Ltd., currently the world's fourth-largest gold producer, recently bought a 50% interest in the South Deep mine in South Africa from Barrick Gold Corp. for a hefty $1.53 billion. South Deep is widely seen as South Africa's last great untapped gold deposit and may contain as much as 29.3 million ounces, equal to about a third of the world's annual gold production.

Gold Fields is also buying shares in Western Areas Ltd., which owns the rest of South Deep. Overall, the deal will increase the Gold Fields' reserves by about half.

Ian Cockerill, CEO of Gold Fields, admits that the company paid top dollar for the South Deep mine at $104 for each ounce of reserves. Compared to the company's historical average of about $60 an ounce, "It is certainly one of the more expensive acquisitions that we have made" Cockerill said, "But then again, it's a very special ore body."

Goldcorp Inc. ponied up about $175 per reserve ounce when it acquired Glamis Gold Ltd. and Iamgold Corp.'s $1.1 billion stock acquisition of Cambior Inc. valued each ounce at about $117 per reserve ounce.

The prospect of a global peak in gold production and the industry's willingness to pay more for gold reserves bodes very well for gold mining and exploration shares. Personally, I like the upside of mid- to small-cap gold explorers right now - especially those trading on the TSX Venture Exchange.

I recommend looking for junior mining firms with savvy management, a proven track record and a decent land package in a geopolitically safe country.

These firms should also have mid- to advanced-stage properties. Historic production and drill results are always a plus. I expect firms like these do to very well over the next few years.

Until next time,

Luke Burgess

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