For those of you who play the Japan index...
I picked this up from a 'gaijin' newsletter I subscribe to in Japan.
Sumitomo Metal Mining announced this last week that it will
spend about JPY40bn (US$360m) on a new gold mine in Alaska,
not far from the Pogo mine that it already owns 51% of.
The Pogo mine was opened in February and is expected to
yield about 450,000 ounces, or about 12.75 tonnes of gold,
annually over its 10 year life. At $608 an ounce (Friday's
closing price for gold bullion), the deposit is worth about
US$2.73bn. Not bad for a first foray overseas by Sumitomo
Metal. The shareholders must be pretty happy!
Reading their press announcement brought back memories of a
plane flight we took back in the mid-nineties, when we had
the good luck to be bumped up to business class and plopped
next to an Australian geologist. He had a surprising story
to tell of a huge, rich gold mine that had been discovered
close to the earth's surface in Kyushu in 1981. He had been
hired in the early 1990's to survey both this and a newer
claim to the south. He told us that the mine in question
was producing 200,000 ounces (5.7 tonnes) of gold per year.
At first we were dumbfounded to hear that Japan still has
working gold mines. Surely, as we're all reminded all the
time, Japan has no meaningful mineral resources and thus
is the perennial underdog? Not so. Apparently thanks to its
volcanos, Japan has an abundance of certain types of
epithermally-produced minerals, such as Gold, silver,
indium, and others.
Doing a bit of research on our return, we discovered that
the gold field he had been referring to was the Hishikari
deposit, near Kagoshima. As it turns out, this is one of
the world's richest mines, although output has been
dwindling just this last 3 years and it is expected to run
out by 2020. The mine is operated by none other than
Sumitomo Metal and in the period 1983 through 1997,
produced about 83 tonnes of gold -- putting it right up
there with the world's other richest deposits in Canada,
Russia, and Australia.
But while the deposit was a good size, what made Hishikari
even more attractive was its fabulously high grade ore.
Apparently the world average for gold yield from ore is
about 5 to 6 grams per tonne. In contrast, the Hishikari
ore yield has been 45 to 50 grams! Further, the ore
deposits lie near the surface, just 150-250 meters down.
Compare this to South African gold mines, where the
deposits lie 3,000m down and are much harder to
So it seems that Sumitomo Metal has had a rather charmed
existence when it comes to gold. In fact the newly
operational Pogo mine is a good example of Sumitomo luck
and good old-fashioned Japanese perserverance. The company
started prospecting its Stone Boy claim southeast of
Fairbanks back in 1991. It's a tough environment where you
can only drill for 3 months of the year because the winter
day-time temperatures drop to -40 to -50 degrees Celcius.
Then there is the wildlife. A geologist at another claim
was attacked by a marauding bear and lost her arms.
Anyway, it seems that while there were 5 partners in the
Pogo venture at the beginning, the environment took its
toll. Over the following 4 years, they dropped out
one-by-one until only Sumitomo was left to continue the
exploration. Company employees say that their experience at
Hishikari taught them that there had to be something there
-- an expensive (US$333m) hunch that eventually paid off
big time. Pogo has an estimated 162 tonnes of gold and a
yield of 17.8 grams per tonne of ore.
Actually, we think Sumitomo Metal Mining is one smart
company. Not only do they make money out of mining gold,
they also turn it into even higher value-added products.
Think about that for a moment... We thought only dentists
could make money out of using gold for something other than
looking at. The company says that it plans to be the
world's largest supplier of gold bonding wire, used in
semiconductors, by the end of this fiscal year. Currently
the company produces about 250,000km a year of the stuff
-- most of which goes into high-end CPUs and other
While Sumitomo is busy in Alaska, Japan's largest producer
of gold, Mitsubishi, is no laggard either. It has just lent
a highly risky JPY5.6bn (US$50m) to the Russians as part of
a syndicated JPY51bn (US$425m) loan, to develop the Kupol
mine, located in Siberia. Kupol is a shallow but rich
deposit which is thought to be Russia's largest gold
deposit. Mitsubishi will have preference in reselling the
ingots on the global market.
Interestingly, although Japanese trading companies are so
heavily involved in mining -- for gold in particular, the
Japanese government has just US$16bn, 3-4% of its reserves,
in gold. Other countries, particularly those that are more
worried about the US dollar losing substantial value this
year or next, hold much more.The Russians, for example,
have said that they want to keep about 10% of their
US$243bn in reserves in gold. And in case you wondered,
private investment in gold globally is about 600 tonnes a
year, about 16% of the overall global consumption of gold.
While the government is not into gold, the people are.
Japanese industry and individuals buy about 140 tonnes of
gold, worth JPY180bn, a year. But perhaps more interesting
is the level of gold hoarding that goes on here. The World
Gold Council reckons that Japanese individuals are hoarding
about 2,000 tonnes of gold worth about JPY5trn (US$44bn),
much of it stashed away after the land price bubble popped
15 years ago. Back then, the gold was worth about
US$380-$400 an ounce, so of course there is a roaring trade
now in people selling off their hoard and investing the
proceeds into the stock market.
2,000 tonnes -- that's about 1/2 of the world's entire
consumption for a year, and represents a lot of assets that
are not circulating in the financial system.