Roy Sebag Introduction: 2013 World Gold Mine & Deposit Ranking

Includes: AU, GLD, GOLD, IAU, PHYS
by: Roy Sebag


It is with great pleasure that I present to you the 2013 Global Gold Mine & Deposit Ranking. This is now our third year of compiling the database which is comprised of 580 Mines and Deposits consisting of over 1 million ounces of in-situ resources in all categories. For more information on our methodology please read our previous reports from 2011 and 2012. For those of you interested in the full report please click here.

The last twelve months have been transformational as the resiliency of the gold sector was tested. This environment brings me great pleasure as I look upon a sea of opportunity trading below tangible value and more importantly the inherent option value as the single best protection against an increasingly probable outcome.

Ultimately, my interest in compiling this list stems from a desire to better understand the gold supply and demand disequilibrium. The interest in gold is more important and stems from the experiences I have encountered as an equity investor practicing an aggressive form of deep-value investing in distressed securities.

For the last 12 years I have been an active participant in financial markets as both a professional investor managing a private investment partnership and a private investor deploying permanent capital. My investment style can be best described as contrarian value investing modeled after the principles codified by Benjamin Graham in The Intelligent Investor with a slight twist when it comes to positioning.

What has brought me success both in my hedge fund and via my private investments has been identifying asymmetric risk/reward situations where the potential long-term fundamental value of a security far exceeds the current value being awarded by market participants. In other words, I look for optionality with extremely long duration providing leveraged upside (but not downside) to a potential event or to my internal assessment of intrinsic value.

For whatever reason, I have always found myself gravitating towards distressed companies that have some kind of an "ick" factor - opportunities that at first glance seem destined for failure. It is in this world where I have made a lot of money constructing a portfolio of long-duration asymmetric bets while being blissfully shielded from the high frequency traders and quants that rebalance portfolios in milliseconds.

Making money in the manner I have has completely warped my view of so called "tail events" and "black swans". For one, they aren't that rare. More importantly, I have learned that humans change their minds very quickly once they catch on to a trend or fad and that market participants can do little to handicap these inflection points. The only way to profit from these opportunities is to position oneself in advance, with un-levered capital that is permanent, and to patiently wait. Eventually if your facts and reasoning are right there will be reconciliation between the market and reality.

Distilling these lessons further I am left with the following bullet points:

  • Market participants are terrible at pricing risk and/or optionality
  • Volatility does not equate to risk.
  • The market will always find a way to punish the herd while rewarding the contrarians. This is in my view the invisible hand of capitalism at work.
  • Academically decorated analysts always miss these events, believe there is a fundamental explanation for everything at the precise moment of their analysis, and spend excessive time on intellectual exercises that ultimately provide no real world utility.

From Graham & Dodd to Von Mises & Hayek

By the summer of 2007, I was running a successful hedge fund and finding it difficult to find attractively priced "ick". I felt the markets were frothy and authored an investor letter entitled: "Reality Approaching". Around that time, I began reading about gold as a potential hedge to what I believed was coming. Initially, it was a challenge to wrap my mind around gold given that I had been brainwashed by all of my favorite value investors to view gold in the investment bucket and assess its intrinsic value by comparing it to other pro-creating investments.

One day while browsing the Mises Institute website, I came across a lecture given by someone named Albert Friedberg in 1999. Here was a man I had never heard of who distilled the essence of gold, fiat money, and central planning into 43 minutes that changed my life. Only later did I find out that Albert Friedberg was a wildly successful yet extremely humble investor who had rarely given lectures, let alone recorded ones. After being inspired by Friedberg, I discovered that he had personally republished a book written in the 1930's by Freeman Tilden: A World In Debt and proceeded to purchase a copy from Amazon (no book store carried one and even today there are very few copies in existence). In A World in Debt, Tilden takes the reader through an incredibly logical account of how debt cripples even the strongest of civilizations given society's inability to deal with debt deflation. For me, the most important lesson from the book was that fiat money, the chief enabler of debt, was not only a flawed monetary system but was illogical and dangerous. For the first time I had a comprehensive understanding of precisely how the modern economic machine worked and how the fiat money system had replaced the animal spirits of capitalism.

Between A World In Debt and Friedberg's Lecture my understanding of world economic history was completely transformed. While it took several more months and about a dozen more books, going into 2008 I felt like Neo when he discovers the Matrix is the true reality he inhabits and like Neo I chose the red pill.

"This is your last chance. After this, there is no turning back. You take the blue pill - the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill - you stay in Wonderland, and I show you how deep the rabbit hole goes. Remember, all I'm offering is the truth - nothing more."

Morpheus, The Matrix

From that point on, gold and finite natural resources (what I define as money in our present global economy which relies on 100% fiat based mediums of exchange) have become cornerstones of my investment process. My commitment ultimately led to the closing of my fund in 2010 so that I could spend more time on this industry. I also formed Natural Resource Holdings (NRH), an asset consolidator of historically proven deposits, creating what I hope will become a perpetuity option on rising commodity prices. I also decided to author this report which has been compiled yearly since 2010 utilizing the type of bottom up analysis I am accustomed to when analyzing securities.

Positioning for the Ultimate Tail Event

I continue to be excited by this industry because it simultaneously provides both protection and optionality on what I believe to be the ultimate tail event: the inevitable reversion back to a tangible/commodity money standard. This event is so alien to present avant-garde economics it has been ruled out as a solution to the problems facing the global economy. However, when analyzing the current state and trajectory it is not only more logical by the day, but mathematically inevitable and soon to be competitively sought by the remaining capitalists on the globe.

One of the main reasons I believe this reversion is more likely today is the failure of the productive classes of the citizenry to express themselves and organize through the political system. In my view, the citizenry in the west has already succumbed to fiat money, taxes, wealth redistribution, and perpetual growth in government. A historical style revolution will not materialize. The power of the internet and social media have given equal and often louder voices to the subsidized classes who have more time to organize and enjoy the network effect made available to them by the productive classes. Even worse, self-interested politicians have mastered the art of leveraging that power into votes.

The majority of the electorate has no recollection of economic history and is incapable of comprehending a pre-1971 economy that rewarded meritocracy and savings. Only through a series of events that will once again highlight the structural flaws of central planning, fiat money, and fractional reserve banking will they by necessity come to terms with the policies that I believe to be superior and accommodative of permanent growth.

Event/Trend A - Central Banker Hubris Leads Academics to Question Keynes/Friedman and to Revisit the Austrian School

Many wonder how and when Central Bankers became masters of the universe. I believe a video from September 19, 1931 highlights the genesis of this trend. In this rare footage of Dr. John Maynard Keynes himself we see a poignant address by Keynes in celebration of the abolition of the Gold Standard by Great Britain. Note Keynes' confidence in asserting that a removal of tangible money would lead to a new era of prosperity with no real negative repercussions.

What made Dr. Keynes so confident in his assertions that the removal of tangible money standard would result in anything different than past precedents set by failed civilizations?

As Aristotle said: "In effect, there is nothing inherently wrong with fiat money, provided we have perfect authority and god-like intelligence for kings." Keynes must have believed his vintage of academic had god-like intelligence or perfect authority.

Looking back at two key data points (CPI and Gold over 200 years) we see that this arrogance wasn't fueled by a superior intellectual framework but rather a type of radicalization to manipulate the business cycle that was ultimately short-sighted and reckless. What you won't see in these charts are generations of prudent households that worked hard over their lifetimes under the belief that when they retired, their hard-earned capital would enable a respectable lifestyle and possibly a bequeathing to their heirs. Parabolic charts like this highlight that the demographic I just described has been replaced by a demographic that is highly levered, addicted to consumption, and lacks the conditioning to defer consumption for savings. A hard working population that produced a well distributed and resilient base of capital which served as the basis for long-term stable growth has been replaced by a population of carrot-chasing mice, running on a pin-wheel that is the global economy, while a segment of the population systematically extracts wealth and capital from them.

What starts out as a British maneuver to manipulate the business cycle evolves into an economic plague that seduces politicians around the world. Ultimately, with this address by Richard Nixon in 1971, the most important host is infected leading the rest of the world to follow shortly and resulting in the first modern era where every nation employs a 100% fiat monetary standard. Note the manipulation which was perpetuated on the American citizenry as Nixon looks straight at the camera and states:

"We will be suspending temporarily the convertibility of the US dollar into gold".

Richard M. Nixon 1971

Fast forward nearly 50 years, and this plague has mutated into a dogmatic approach to monetary theory that reigns supreme in a manner that is uniquely undemocratic. Central bankers today are the most powerful people in the world and maintain their power by manipulating the public into believing their economic theories are the only game in town. They have no outside oversight and operate in a manner akin to a cartel. A perfect example of this "judge, jury, and executioner" mentality can be found in this article published a few weeks ago by Bloomberg. Here we see a blatant attempt by Dr. Stanley Fisher, the former Central Banker of Israel and MIT Professor, to scare us mortals into believing we owe a debt of gratitude to the world's central bankers: "Without Ben, we'd all be in much worst shape". In my humble opinion Dr. Fischer is in no position to pass judgment on his former student and most definitely not a few hundred days following the implementation of his policies.

The power to create money from nothing is exceptional power. History has proven that power corrupts. So why are we going through one more test to see if it's true? Retesting the axiom seems like retesting one of the laws of physics. Yet, our central banking system and the fiat money it produces are predicated on human control over an infinitely complex economy. Hayek, the great Austrian economist, called this ``Fatal Conceit``. Keynes suggests it could be controlled. However, even Keynes would disagree with some of the policies that are now called ``Keynesian" and Keynesianism is certainly under stress. Doubts about its long term efficacy abound. The Keynesian community totally misread the coming of the 2008 disaster. After they did they repeated a very common mantra: " Nobody saw it coming". The truth is that virtually every Austrian School economist saw it coming. It is just that there weren't any Austrian School economists within the mainstream power structure. They were outcasts, but it is past time to bring them into the decision making process.

I believe the seeds for this trend have already been planted. Most recently we have seen a surprising amount of Pro-Keynesian economists explore the theory of stock vs. flow. For academics, only a highly academic and trendy theory can combat the current trends in academic theory. In stock vs. flow I believe we have such a theory as it is becoming a larger hole in the central bank argument. It is only a matter of time before academics begin to publish papers exposing these holes leading to a re-examination of these policies. When they finally open their eyes they will discover that a well-articulated, rational, and sophisticated theory exists for tangible commodity money practiced by great economists such as Ludwig Von Mises, and Frederic Hayek of the Austrian School.

Event/Trend B - When Capital is Free Hoarding Ensues

At some point there will be a realization by market participants, consumers, and producers of agriculture, forestry, fishing, and mining that an inflection point has occurred with respect to hoarding of these products. It is imperative to note that since 1971 when world economies were largely based on commodity money (NASDAQ:GOLD), human consumption patterns have changed drastically to the point where the average family visits a super-market on a daily/weekly basis. The elasticity of certain commodities is such that a simple increase in the tenor of visits to a supermarket could markedly reduce the supply of certain commodities causing shortages and inflation. As far as market participants are concerned, the artificially suppressed cost of capital and interest rates make it more logical to hoard commodities for future sale than to mine/produce them.

Event/Trend C - The Race to Re-embrace Capitalism

Influenced by events A and B, there will be a tipping point when surplus nations realize that being a first mover to commodity backed money will change the paradigm of global leadership, turning their currencies into foreign reserve assets while permanently crystallizing their wealth. I sincerely believe that China would be devaluing their fiat currency (the RMB) had they not been secretly thrilled at the idea of accumulating more finite raw materials at artificially low prices for their 100 year plan. This is an important point that is often overlooked as market participants tend to forget that China is implementing economic policies based on multi-decade goals while global central bankers manage their economies on a daily basis and western politicians write laws to avert hourly crises.

I believe that these three trends will converge resulting in a much more conservative monetary policy that in some nations may mean a reversion to some type of commodity money (gold standard). These series of interrelated trends will together form the biggest tail event as very few are positioned for a reversion to this type of economic activity.

Coincidentally, it is not the poorer classes who will suffer the most but the over-indebted wealth class that has pushed the envelope of the current system by producing something they believe is wealth while pursuing unproductive activities. The biggest disappointment of fiat money is that contrary to Keynes original vision it has only made wealth disparity wider, as the wealthy are the first to benefit from money printing while each round of QE permanently raises the cost of basic goods and services for the poor.

Only Tangible Money Can Peacefully Bail Out The Fiat Money System

In 2008 the over-indebted financial segment of the global economy collapsed with Lehman Brothers being the straw and AIG being the nail that would effectively bankrupt the imprudent risk takers within that segment. The biggest lie perpetuated on the citizenry was that the collapse of this segment of the economy would have impacted everyone. It was a lie because the usage of extraordinary measures to stabilize and provide liquidity should have been limited to protect depositors and/or securities with the implicit guarantee of respective nations. Some level of money printing would have been required in order to achieve this objective, however the moral hazard associated with such an event could have been rationalized. Prudent savers that had entrusted their federally insured banks with capital would have been protected entirely; retirees that support their nation by purchasing principal guaranteed debt instruments deservedly would have been protected too.

The morning after such an event, the prudent savers would have woken up with the ability to redeploy that capital how they saw fit, such as in risk assets at depressed levels. Everyone else with any risk that exceeded their equity capital would have been wiped or at the least stuck in a well-deserved deleveraging cycle for several years. A reset of epic proportions would have ensued, bringing opportunity and equality to millions by resetting both opportunity and risk. The result would have been a healthier economy with sound fundamentals. Savings would have fueled an investment boom that ultimately would have led to natural growth and prosperity.

We all know that this was not the route chosen by the powers that be. In September of 2008 the rules were changed. Utilizing the fiat money system, central bankers began to arbitrarily subsidize the indebted segment, bailing out bad business decisions by devaluing (printing money) the capital accumulated by the prudent classes. When I say prudent classes, I am not referring to the billionaires who game the system and for the most part were bankrupt had it not been for the bailing out of AIG CDS contracts. I am referring to the individual who had $250k in a CD with his regional bank and would have been able to redeploy that in a reset economy that rewarded his prudence and labor.

Instead, we saw the continuance of the Ponzi scheme with a bail-out for the over-indebted segment of the economy (the real estate developers, the leveraged buyout kings, and the big banks) plus a disproportionate reward of nearly $20 trillion of value increase since 2009 (increase of stock market value and real estate value in the US alone).

Nearly six years later the bailout is still taking place by artificially suppressing the interest rates while simultaneously devaluing the money of the prudent saver to the tune of nearly $1 trillion a year. The objective is clear: force the saver out of risk-free assets and into high-beta, fundamentally unsound, and leveraged securities. This is the biggest forced redistribution of wealth in history and while it is extremely unfortunate for the savers who see their hard-earned wealth eroding to the tune of nearly 10% a year, there is in my view a positive outcome to all of this insanity.

The fiat money system is vulnerable for the first time since 1971 with global central banks now stuck in a liquidity trap. They have pushed the bubble deeper by assuming the financial risk of the private sector, the government, and quasi-government agencies and in doing so have forsaken their own ability to positively affect the economy. If they stop printing money growth will slow and rates will rise, whereas if they raise rates growth will slow followed by deflation.

The only thing keeping the system going is the temporary willingness of citizens around the world, specifically in surplus nations, to part with their goods and services for indebted western nation fiat money. The end of the fiat money system will materialize once a combination of the three trends I highlighted previously takes form. It is impossible to predict which trend will occur first. They may manifest in different ways or in a different order but I am convinced that some form of these trends will take hold in my lifetime. When they do, the fiat money system will have to be bailed out just as the financial system was bailed out in 2008. It is simply a matter of mathematics.

The only thing capable of bailing out the fiat money system while maintaining some sort of continuance of society and power in its present form is a re-rating of the monetary unit of exchange by implementing a commodity money standard. History shows many examples of this and it is a surprisingly seamless process. When confidence in the medium of exchange (money) erodes, a government has no choice but to introduce a tangible commodity backed unit of exchange for people to regain their confidence. The solution to a currency crisis can only be a new currency that is indexed to something tangible like gold which correlates well with the supply and demand trends of other necessary commodities consumed by our civilization. For those wondering why gold serves as the best medium of exchange I recommend reading this piece written by Passport Capital in 2008. Unfortunately, the rare attributes of gold are not taught as part of today's K-12 curriculum. Here is my understanding of why the naturally occurring element Gold (NYSE:AU) serves as the best medium of exchange.

Gold - Naturally Occurring Perfect Money

Our industrialized society is based on a free market economy that leverages a global division of labor to raise living standards and unleash maximum human potential, thereby creating prosperity. There are many qualitative and quantitative factors that must come together for this process to work but there are four foundational industries which we could never do without. They form the genesis from which every transaction in the economy follows. I call them MAFF (Mining, Agriculture, Fishing, and Forestry). These four industries produce the raw commodities we need to consume in order to maintain the status quo from which we build secondary, tertiary, and even more complex industries such as service based, technology based, and asset based industries.

As such it is necessary for a medium of exchange to be inextricably linked to the MAFF industries while not impeding the growth of those industries. Without such a link, the medium of exchange will not successfully retain value between transactions in the different segments of the economy. That is why Bitcoin will never work as a ubiquitous form of money (as Jim Rickards has so eloquently debated here). Gold has incredible attributes that link it to the MAFF industries while not competing with them. At .0011 parts per million, gold is the rarest of all industrial commodities. This means the production of gold is linked with the growth in supply of other commodities while the proportion will always make it more sought after in a market based exchange system. The other wonderful attribute of gold is that when measured correctly it is equally distributed amongst the continents of earth. As we show in our yearly report, the nations that most promote gold exploration are the ones to discover gold irrespective of their geological endowment.

Gold or Tangible Commodity Money Promotes Lasting Prosperity (Stairwell vs. Slope)

The most troubling aspect of the last 40 years has been the lack of resiliency inherent in the global financial system. Every few years it seems we are on the brink of erasing several years' worth of growth and prosperity. The notional figures will always mask this as they are quantitatively manipulated by the central banks. For the most part people work harder today than they did before 1971, consume less quality products on a per capita basis, and have more debt and less wealth to bequeath to their heirs. There is also very little predictability in the global economy today. With the artificial suppression of interest rates came the removal of the risk-free rate of return for savers. That means savers cannot live a respectable retirement without digging into the principal they so carefully protected for decades. This type of growth is akin to ascending a slope. One mistake and you will slip several levels below your high water mark with each level representing a year.

If you take the time as I have and read the history books you will note that prosperity achieved on a gold or other tangible money standard is akin to ascending a stairwell: Growth may have been notionally harder to achieve but the reward is a permanent ascension in prosperity. When you struggle you can pause, rebalance, and reposition your economy for growth and when that growth comes it will be from near the highest water mark.


I hope this letter helps you better understand the importance of gold and why I continue to be excited by the gold mining industry. I am of the belief that every diversified portfolio should have some permanent exposure to gold. The gold price does not need to rise much notionally for the industry to be wildly profitable. A reacceptance of gold in the financial system would place a "put" under every gold deposit in the world turning mine finance into a highly liquid asset class resembling the mortgage finance market today. This would result in gold deposits with proven economics being worth their NPV overnight and a rush to discover and re-explore brownfields and anomalies.

This process will most certainly require patience as the state of the industry today is not good. Luckily, an investor today is rewarded with valuations that offer significant downside protection and substantial upside. As you will see throughout the rest of this report, there are only 580 mines and deposits on earth with over 1 million troy ounces of in-situ gold with less than 200 in North America. Compare that to 2,000 billionaires, 50,000 Picassos, and $230 trillion in global financial assets. I cannot think of a better asset class I would rather be invested in over the coming decades. As for physical gold, our research this year shows that we are nearing peak gold production as the total in-situ ounces when adjusted for metallurgical recoveries and average mine life are about 50% less than what is required to maintain the current production trends.

I would like to thank Josh Crumb and Bill Kuta their assistance with the list this year. I would also like to thank Jeff Desjardins and his team at Visual Capitalist for once again collaborating with us on the production of this report.

To the view the rest of the 40 page report which includes the database of 580 mines and deposits, click here.


Roy Sebag

November 17, 2013

Disclosure: I am long NG, OTCQX:SNWRF, NAK, RVM, OTC:APQUF, NRHYY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.