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Chile could become one of the world's 10 largest gold producers

Juan Cristóbal Ciudad

Manager of market analysis/Cochilco

Published  Friday, October 16, 2009

In the last few days it has become almost routine for the spot price of gold to break all-time nominal records, generating great enthusiasm for the precious metal.

Although gold is still far from coming close to all-time records in real terms, and in addition there are expectations that prices will start falling along with the recovery of the global economy, today's values are enough to allow for generous margins.

Therefore, interest is on the rise in creating new operations to exploit this resource, with its price hovering around US$1,054/oz in London.

BNamericas spoke with Juan Cristóbal Ciudad, expert in gold and manager of market analysis for Chile's state copper commission Cochilco.

Although Cochilco specializes in copper - Chile's main export - the commission also has extensive knowledge on the mining potential of Chile and the rest of the world concerning gold.

BNamericas: Although Chile today is not considered one of the world's largest gold producers, according to the US Geological Survey it has known reserves that exceed those of Latin America's traditional large producers, Mexico and Peru. In light of this, does Chile have the potential to become one of the globe's main producers?

Ciudad: As you mentioned, these are known reserves based on exploration already completed. Therefore, data from new exploration would be incorporated into the amount of known reserves, obviously.

Concerning exploration in the countries of Latin America that produce gold - Mexico, Peru, Chile, Argentina, Colombia and Brazil - the majority has been carried out in Mexico, followed by Peru, Brazil and after those Chile.

In last year's gold exploration investment, Mexico had the largest amount with about US$300mn, followed by Peru with some US$150mn, Brazil with about US$150mn and Chile with some US$110mn.

BNamericas: Is it possible to determine, besides taking into account investment figures, which of those nations has the most potential to increase its known gold reserves or would that only be accomplished by carrying out the actual exploration? In the case of Chile, do its known reserves include the giant deposits of Cerro Casale and Pascua Lama?

Ciudad: It's difficult to say without carrying out the exploration. There is also another factor, which is that after discovering the gold it must be determined if it's economically viable to develop it.

In the case of Chile, its known reserves do take into account Pascua Lama and Cerro Casale, which increase considerably the amount.

BNamericas: Many in the industry consider Chile a mature mining district with not much potential for discovery of giant deposits like the ones mentioned. In your opinion, is there any hope of finding another Pascua Lama or Cerro Casale?

Ciudad: There is the Lobo Marte deposit [owned by Kinross Gold] in region III, which has about 180t in gold resources in the indicated and inferred categories. This is a very respectable amount taking into consideration that Cerro Casale has some 700t.

Also in region III there is the El Volcán deposit, which has about 200t. These are interesting figures even though they are not of the size of Cerro Casale and Pascua Lama.

However, one must take into account that these are all standalone projects, as opposed to ones that build on operations already running. In the latter ones there is also a great deal of potential for expansion of reserves.

BNamericas: As for Chile's output, what ranking would the country have if all the projects mentioned reach production?

Ciudad: At present Chile is the 16th largest gold producer in the world with about 40t of output last year. Argentina was neck and neck with 41t, Mexico had 50t, Brazil 59t and Peru led in Latin America with 180t.

Taking into account the start of Pascua Lama and Cerro Casale, Chile's production would increase to about 100t, making it one of the 10 largest producers in the world and likely second in Latin America.

But one must also consider the projects of the region's other countries, particularly those in Mexico. With those Chile would likely battle for third or second place with Mexico.

BNamericas: As for the importance of gold within Chile's internal mining industry, currently the country's most important mineral is copper, followed by molybdenum. Could gold replace molybdenum as the second most important metal?

Ciudad: One would have to consider the ups and downs in prices for both those metals. But by making a quick calculation of the country's amount of both, I'd say the increase in gold output would reduce the gap between molybdenum and gold as the second most important mineral in terms of export revenues.

BNamericas: As for the scale of gold projects, those we have discussed - just like most mining projects in Chile - are ones that fall into the category of large-scale mining. But as these giant deposits come into production, and with them Chile rises in the global gold industry, do you see potential for interest growing to develop smaller deposits of say 30,000oz/y?

Ciudad: I have heard from colleagues in other markets, such as those in Australia for example, that there is a great amount of enthusiasm for starting smaller high-cost projects like what you describe. This is thanks to the fact that gold has maintained its value, unlike base metals which plummeted with the crisis.

BNamericas: As for the market value of gold, some analysts feel there is still room for increases, perhaps of about US$200/oz from its present value, but not much more than that since it's expected that the global economy will soon recover. But in real terms, the metal would have to double its current nominal amount to come close in real terms to prices in the early 1980s. In your opinion, do the market fundamentals exist in order to make that possible?

Ciudad: Today's fundamentals indicate that the price should start falling soon along with the economic recovery, but even then there will be enough room for healthy margins taking into account current production costs. Therefore, the metal will continue to be attractive.

But as for how prices will compare to those in the 1980s, it's possible that we will not see those again because that period had a series of factors that today don't exist. At the time the world was still coming out of the period in the 1970s in which governments liberated themselves of the gold standard on which they based their currency values, in addition to a number of other sources of instability.

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