The Case for Toll Milling in Peru
Gold toll milling infographic presented by: Montan Mining
Peru is South America’s largest gold producer and exporter. Worldwide, the country also has the fifth highest gold production.
2014 production: 5.44 million oz (5.4% of global production)
2014 Global production: ~100 million oz
However, the Peruvian government estimates that illegal mining accounts for about 20% of gold exports. This mining is done by tens of thousands of artisanal, small-scale miners who use metallurgical processes from centuries ago.
Illegal mining has environmental and safety repercussions. One of the largest concerns about artisanal mining is how gold is processed from ore. Many of these miners use mercury for this – a vastly dated technique.
Overexposure to mercury can cause neurological damage, such as negatively affecting cognitive thinking, memory, attention and language.
To tackle the growing environmental concerns and also capture $305 million in lost taxes, Peru has moved to regulate the industry.
The government wants to ensure that permitted mineral processing facilities using modern technology only purchase feed material from permitted miners.
So far 80,000 of 150,000 miners have applied to be formalized.
The Toll Milling Business Opportunity
Artisanal miners need to sell their ore to licensed processing facilities. Owners of licensed facilities with experience as mineral buyers can make money by safely and economically processing feed for artisanal miners through toll milling.
How the model works:
- Test and select ores from artisanal miners to see what is worth purchasing
- Buy ores from a variety of miners and build relationships.
- Prices are set at time of purchase and are at discount to market.
- Process ore shortly after and sell gold back to the market.
The Risks of Traditional Gold Production
The costs of mining itself have escalated, with cash costs soaring in recent years. Combined with dropping gold prices since 2012, this has put many producers under the gun.
However, companies using the toll milling model have been able to outperform. This is because toll milling has several benefits:
Advantages in Risk:
- Not dependent on one source of ore.
- Commodity price fluctuations have less impact.
- Margins are protected.
- No cost of production, only cost of processing.
Advantages in Capital:
- Path to cash flow is shorter.
- Payback period is shorter.
- Less permitting and development challenges faced.
- Less capital intensive.
How Big is the Market?
Peru’s gold production of 5.44 million oz (2014) at the average gold price ($1266.40) is worth US$6.9 billion.
The artisanal market is estimated to be 20% of this for 1.1 million oz, or $1.4 billion.
This mean’s just Peru’s artisanal market is similar in size to the total markets in Mexico, Tanzania, or Chile.
With only a few publicly traded toll millers in that market and thousands of more artisanal miners in Peru yet to be formalized, the market has big potential. Compare this to the above markets, where thousands of companies are vying for the same finite resources.
The Silver Series: The Start of A New Gold-Silver Cycle (Part 1 of 3)
As the decade-long bull run shows signs of slowing, is it time for precious metals to shine? Here’s why it could be the start of a new gold-silver cycle.
The world has experienced a decade of growth fueled by record-low interest rates, a burgeoning money supply, and historic debt levels – but the good times only last so long.
As the global economy slows and eventually begins to retract, can precious metals offer a useful store of value to investors?
Part 1: The Start of a New Cycle
Today’s infographic comes to us from Endeavour Silver, and it outlines some key indicators that precede a coming gold-silver cycle in which exposure to hard assets may help to protect wealth.
Bankers Blowing Bubbles
Since 2008, central bankers around the world launched a historic market intervention by printing money and bailing out major banks. With cheap and abundant money, this strategy worked so well that it created a bull market in every sector — except for precious metals.
Stock markets, consumer lending, and property values surged. Meanwhile, the U.S. Federal Reserve’s assets ballooned, and so did corporate, government, and household debt. By 2018, total debt reached almost $250 trillion worldwide.
Currency vs. Precious Metals
The world awash in unprecedented amounts of currency, and these dollars chase a limited supply of goods. Historically speaking, it’s only a matter of time before the price of goods increases or inflates – eroding the purchasing power of every dollar.
Gold and silver are some of the only assets unaffected by inflation, retaining their value.
Gold and silver are money… everything else is credit.
– J.P. Morgan
The Perfect Story for a Gold-Silver Cycle?
Investors can use several indicators to gauge the beginning of the gold-silver cycle:
- Gold/Silver Futures
Most traders do not trade physical gold and silver, but paper contracts with the promise to buy at a future price. Every week, U.S. commodity exchanges publish the Commitment of Traders “COT” report. This report summarizes the positions (long/short) of traders for a particular commodity.
Typically, speculators are long and commercial traders are short the price of gold and silver. However, when speculators and commercial traders positions reach near zero, there is usually a big upswing in the price of silver.
- Gold-to-Silver Ratio Compression
As the difference between gold and silver prices decreases (i.e. the compression of the ratio), history suggests silver prices can make big moves upwards in price. The gold-to-silver ratio compression is now at high levels and may eventually revert to its long-term average, which implies a strong movement in prices is imminent for silver.
- Scarcity: Declining Silver Production
Silver production has been declining despite its growing importance as a safe haven hedge, as well as its use in industrial applications and renewable technologies.
- The Silver Exception
Silver is not just for coins, bars, jewelry and the family silverware. It stands out from gold with its practical industrial uses which account for 56.1% of its annual consumption. Silver will continue to be a critical material in solar technology. While photovoltaics currently account for 8% of annual silver consumption, this is set to change with the dramatic increase in the use of solar technologies.
The Price of Gold and Silver
Forecasting the exact price of gold and silver is not a science, but there are clear signs that point to the direction their prices will head. The prices of gold and silver do not accurately reflect a world awash with cheap and easy money, but now may be their time to shine.
Don’t miss another part of the Silver Series by connecting with Visual Capitalist.
Why Gold is Money: A Periodic Perspective
Gold has been used as money for millennia. People often attribute this to beauty, but there are basic physical properties for why gold is money.
Why Gold is Money
The economist John Maynard Keynes famously called gold a “barbarous relic”, suggesting that its usefulness as money is an artifact of the past. In an era filled with cashless transactions and hundreds of cryptocurrencies, this statement seems truer today than in Keynes’ time.
However, gold also possesses elemental properties that has made it an ideal metal for money throughout history.
Sanat Kumar, a chemical engineer from Columbia University, broke down the periodic table to show why gold has been used as a monetary metal for thousands of years.
The Periodic Table
The periodic table organizes 118 elements in rows by increasing atomic number (periods) and columns (groups) with similar electron configurations.
Just as in today’s animation, let’s apply the process of elimination to the periodic table to see why gold is money:
- Gases and Liquids
Noble gases (such as argon and helium), as well as elements such as hydrogen, nitrogen, oxygen, fluorine and chlorine are gaseous at room temperature and standard pressure. Meanwhile, mercury and bromine are liquids. As a form of money, these are implausible and impractical.
- Lanthanides and Actinides
Next, lanthanides and actinides are both generally elements that can decay and become radioactive. If you were to carry these around in your pocket they could irradiate or poison you.
- Alkali and Alkaline-Earth Metals
Alkali and alkaline earth metals are located on the left-hand side of the periodic table, and are highly reactive at standard pressure and room temperature. Some can even burst into flames.
- Transition, Post Transition Metals, and Metalloids
There are about 30 elements that are solid, nonflammable, and nontoxic. For an element to be used as money it needs to be rare, but not too rare. Nickel and copper, for example, are found throughout the Earth’s crust in relative abundance.
- Super Rare and Synthetic Elements
Osmium only exists in the Earth’s crust from meteorites. Meanwhile, synthetic elements such as rutherfordium and nihonium must be created in a laboratory.
Once the above elements are eliminated, there are only five precious metals left: platinum, palladium, rhodium, silver and gold. People have used silver as money, but it tarnishes over time. Rhodium and palladium are more recent discoveries, with limited historical uses.
Platinum and gold are the remaining elements. Platinum’s extremely high melting point would require a furnace of the Gods to melt back in ancient times, making it impractical. This leaves us with gold. It melts at a lower temperature and is malleable, making it easy to work with.
Gold as Money
Gold does not dissipate into the atmosphere, it does not burst into flames, and it does not poison or irradiate the holder. It is rare enough to make it difficult to overproduce and malleable to mint into coins, bars, and bricks. Civilizations have consistently used gold as a material of value.
Perhaps modern societies would be well-served by looking at the properties of gold, to see why it has served as money for millennia, especially when someone’s wealth could disappear in a click.
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