By Richard (Rick) Mills
Ahead of the herd

As a general rule, the most successful man in life is the man who has the best information

Pure gold deposits are increasingly difficult to find.

?What really bothers me is that in the 1980s or 1990s, we saw three to five discoveries of 5 to 20 million ounces each, and upwards of 30 to 50 million ounces a year. That is what makes or breaks the industry. There are no discoveries of that magnitude now.? Pierre Lassonde, veteran gold analyst, co -founder/chairman of Franco Nevada Mining Corp., former president of Newmont Mining Corp.

Each year the mining industry must come up with a major new gold discovery of five million ounces just to replace what one of the world’s top gold miner’s digs up. Because large pure gold deposits are so hard to find - the low hanging fruit has already been picked - gold miners are turning to deposits that contain other metals like copper.

"In the case of gold, the world is currently mining it faster than it is finding it. Furthermore the average size and grade of gold discoveries continues to decline.? Richard Schodde, Managing Director of MinEx Consulting

Mining is the story of depleting assets, that asset must be constantly replenished; miners that want to stay in business must replace every oz taken out of the ground and there isn’t a lot of the larger size gold deposits left to find or buy that would really affect most of these larger company’s bottom lines. Replacing what they’ve mined let alone finding more productivity/resources is getting harder and harder.

"It's not a bad time to diversify if you are a gold miner. There are lots of reasons to be bullish on gold, at the same time copper has a stronger longterm outlook. Over the next five years I am by and large bullish and wouldn't be surprised if copper saw an upper range between $10,000 to $12,000." William Adams, analyst at FastMarkets.com

Porphyry Copper/Gold Deposits

Porphyry copper/gold targets are becoming increasingly important in the global quest to replace declining copper and gold production. These kinds of deposits yield about two-thirds of the world’s copper and are therefore the world’s most important type of copper deposit.

Porphyry copper deposits are copper orebodies which are associated with porphyritic intrusive rocks and the fluids that accompany them. Porphyry orebodies typically contain between 0.4 and 1 % copper with smaller amounts of other metals such as molybdenum, silver and gold.

There are two factors that make these kinds of deposits so attractive to the world’s major mining companies ? firstly by focusing on profitability and mine life instead of solely on grade your other inputs of scale/cost can offset the lower grade and this results in almost identical gross margins between high and low grade deposits. Low grade can mean big profits for mining companies ? Copper/gold porphyries offer both size and profitability.

The second factor affecting profitability of these often immense deposits is the presence of more than one payable metal ie for gold miners using coproduct (copper) accounting the cost of gold production is usually way below the industry average.

So not only are the traditional miners of these scarce and often immense ore bodies in competition for them but increasingly yesterdays gold only miners are
becoming interested as well. These kinds of deposits are one of the few deposit types containing gold that have both the scale and the potential for decent economics that a major gold mining company can feel comfortable going after to replace and add to their gold reserves.

The Vancouver Sun newspaper said high copper demand combined with limited new supplies have made copper the new gold as far as profit margins are concerned.

Copper boasts a higher profit margin than gold ? at US$4.29 (U.S.) per pound copper has a 68-per-cent profit margin over industry average break even costs, compared with gold's 52 per cent.

"As 2011 unfolds, we expect copper to touch $5, yielding an extraordinary 70 per cent profit margin over average world break-even costs including depreciation." Patricia Mohr Scotiabank economist

Supply and Demand

Copper is supported by:

- The growth in demand from Africa, China, India and other emerging markets
- Global infrastructure deficit
- A low interest rate environment bodes well for the whole resource sector
- The overall weakness in the U.S. dollar translates into support for dollar denominated metal prices

In the Scotiabank Commodity Price Index report for April Mohr said ?Copper could still retest the previous US$4.60 record of February 14. Chinese copper fabricators destocked copper and produced 2.1% fewer copper semis in January and February due to credit restrictions and high prices. However a big seasonal pick-up in consumption in the second quarter will lift prices."

?We see renewed strength in the second half and you’ve got to be bullish copper for the next few years. The global recovery is becoming more broadbased and you’re not going to see any new mines coming on stream for at least this year.? Christin Tuxen, analyst at Danske Bank A/S

Australian equity research firm Resource Capital Research (RCR) said it expects the copper market to move from a small surplus in 2010 to a deficit of around 400,000 tonnes by 2011.

According to JPMorgan Securities Ltd, the world refined copper market will have a 500,000-metric-ton deficit in 2011.

BHP Billiton Ltd. ((BHP)), the world’s largest mining company, said in January that output from their Escondida mine in Chile, the world’s largest copper mine, would drop by as much as 10 percent in the year ending in June because of lower ore grades.

Codelco, based in Santiago and the world’s largest copper producer, said on March 25 that supply from its mines fell for the fifth time in six years. London based Anglo American Plc and Kazakhmys Plc reported lower output this year.

Michael Jansen, metals strategist at JPMorgan Securities Ltd, predicts a deficit of 500,000 tons to 600,000 tons this year.

Macquarie expects a shortfall of 550,000 tons.

Morgan Stanley projects copper prices will average $4.45 a pound in 2011, up 24 percent from an earlier estimate.

Australia & New Zealand Banking Group Ltd expects copper to average $4.57 a pound this year, up 12.5 percent from a previous estimate.

European copper producer Aurubis said that the global economy continues to recover, according to the IMF, and should achieve a growth rate of 4.4% in 2011 followed by 4.5% in 2012. This indicates sustainably high copper demand that cannot even be harmed by China's restrictive interest rate policy or the economic weakness of certain countries.

The market will see a wider deficit because of steady demand growth in emerging markets, including China and Brazil, a gradual economic recovery in the US and Europe and tight mine supplies. This year's deficit will be the most since 2004, according to company data. Hidenori Kamoo, general manager of the marketing department at Pan Pacific Copper Co

Tom Albanese, CEO Rio Tinto Group((RIO)), the world’s second largest mining company, said that the industry has struggled to maintain supply because of declining ore grades, delays to mine expansions and disruption from strikes.

Ore grades averaged 0.76 percent copper content in 2009, compared with 0.9 percent in 2002. CRU, a London based research company.

Chile mined 6.6 percent less copper in February than a year earlier, the fifth decline in the last six months. National Statistics Institute

?There are still reasons to be bullish on copper into next year. The market is still going to be tight.? David Wilson, analyst Societe Generale SA