The Financial Metrics of Gold Discovery

The Cost of Discovery

Discovering economic gold deposits requires extensive upfront investment. Based on historical data, the average cost to find and develop a 5 million ounce gold deposit is estimated to be around $250 million when including all drilling and related exploration expenses.

Looking at global exploration over the past decade, approximately $35 billion was spent on early-stage "greenfields" exploration worldwide. This activity resulted in 23 major discoveries with over 10 million ounces of gold equivalent resources. Simple division shows an average discovery cost of $1.5 billion per 10 million ounce deposit.

However, costs can vary widely based on factors like location, geology, depth, and more. For example, Barrick’s Cortez Hills deposit in Nevada cost over $2.5 billion to find and develop its 15 million ounce resource. By comparison, Detour Gold spent only around $150 million to find and delineate 16 million ounces at its Detour Lake property in Ontario.

Despite the high upfront costs, major new gold discoveries can generate robust returns on the capital invested once brought into production. Assuming a $250 million discovery cost, a 5 million ounce deposit would need to generate around $500 million in pre-tax cash flow at $1000/oz gold to recover costs. At current prices above $1800/oz, returns are even higher.‍

What Investors Should Know

• Early exploration is risky and requires significant upfront capital with no guarantee of discovery. Investors need patience and tolerance for risk.
• World-class discoveries generate substantial returns on investment and value creation, justifying the high costs. Hits can far outweigh the many misses.
• Discoveries in mining-friendly jurisdictions with low geopolitical risk provide the best returns given their development potential.
• Investing in a portfolio of explorers and prospects diversifies risk rather than betting on a single company or project.
• Explorers with experienced management, strong technical teams, quality assets, and capital tend to perform best.

Conclusion

The enormous value creation potential of a major new discovery will continue to attract exploration investment in the mining space. With prudent analysis of geological potential, financial risks, and explorers' capabilities, gold investors can benefit.