Price of Commodities and CommEx overview

You might ask yourself, where do these producers like Barrick and Kinross sell to if not directly to consumers?

They deal in units of 10,000 ounces+ and as much as some people might like to keep gold in their secure safe at home, this level is generally reserved for jewelry makers and of course, commodity traders. With that said, let's talk about where commodities like gold are traded.

Naturally, the price of gold, copper, and other precious metals are traded at an exchange, much like stocks would trade on the Toronto Stock Exchange and the TSX Venture (http://www.tsx.com) and New York Stock Exchange (http://www.NYSE.com)

On the left I've added a price of commodity chart from KITCO (http://www.kitco.com) real time as of today.

As you can see from the green line it last traded at $873.

This price refers to the price of gold PER ounce.

Now it may be funny to imagine commodity traders in Armani suits running around throwing bars of one-ounce gold at each other, but that's certainly not what happens in the digital age. Traders use what's referred to as futures to get rid of all this logistic problem of heaving around heavy bricks of gold or commodity.

Futures (contract)

"In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price.

A futures contract gives the holder the obligation to buy or sell, which differs from an options contract, which gives the holder the right, but not the obligation. In other words, the owner of an options contract may exercise the contract, but both parties of a "futures contract" must fulfill the contract on the settlement date. The seller delivers the commodity to the buyer, or, if it is a cash-settled future, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset their position by either selling a long position or buying back a short position, effectively closing out the futures position and its contract obligations."

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Suffice to say, there is plenty of speculation amongst the traders every day about which direction commodities are about to go, which leads to fluctuation of price as news about inflation, job data, major industries, energy price, etc come out to the market.

Tradtionally, gold and housing have been termed the best hedge against inflation. Thus, when you see the devaluation of the dollar (US) or higher than usual inflation data, your ounce of gold probably just went up by 1% or more!

Hope this brief overview has been helpful, please e-mail me if you have any inquiries!

Glossary of frequently used terms

Many of these geological terms are lost on people who aren't mining analysts or professional geologists. Here's a summary of some common mining terms that should come in handy when you are interpreting the latest statements or release from a mining firm.

Porphyry copper-gold deposits:

These are major contributors to new gold supply, yet most investors know very little
about them.



Just to explain briefly what a porphyry copper-gold deposit is - these are typically low
grade, bulk tonnage deposits which can only be economically mined using economies
of scale and relatively low cost open pit techniques.

In the unoxidized ores, the gold
occurs within copper and iron sulphides and cannot be mined by itself. Consequently,
copper-gold mines only do really well when both the copper and gold prices are both
healthy, but once the capital costs of building the mine and infrastructure are recovered
these mines can carry on for years, weathering the storm when either gold or copper
are lower in price.

Porphyry bodies in ideal cross section look like giant, upright lightbulbs. They can have
considerable vertical extent. They are made up of varieties of granite, formed by the
melting of the leading edges of oceanic plates, as they dive beneath continental
masses, inboard of collisional zones. They’re usually found a few hundred kilometres
from the coast. Porphyry copper deposits are found in the western USA, British
Columbia, and the west coast of South America, as well as in the Philippines and
Indonesia.

The copper sulphides typically occur in crisscrossing networks of quartz
veinlets within and throughout the porphyry rock. “Copper-gold” porphyries are rarer
than copper porphyries - the designation is arbitrarily set at >0.4 g/t Au. To recover the
metals porphyry ore is crushed and then most often processed using flotation. The
sulphide “concentrate” which is floated off is then shipped to a smelter where gold and
silver are recovered in addition to the copper. It’s important to recognize that cyanide
heap leach-type recovery such as used at many gold mines, is inappropriate for this
type of ore.

http://www.straighttalkonmining.com/docs/pdf/stom17.pdf

Assays:
Assaying is a means of determining how much metal is contained in a sample. Usually completed at a qualty controlled ISO 9001 laboratory.

Breccia:
Is coarse-grained sedimentary rock composed of broken fragments (clasts) of pre-existing rocks held together in a fine-grained matrix. Breccia is a mineralisation typical of epithermal deposits.

Drilling:
Typically completed with diamond drills




Induced Polarization (IP)
Method of ground geophysical surveying employeing an electrical current to detemrine indications of mineralization.

Stockwork veining
Densely distributed veining

How Gold is Produced

Barrick has a very nice summary about the process that gold is produced, which also included a nice synopsis about how junior mining explorers operate. (high lighted in red font)

Spinning Gold: From Ore to Bullion

Since the California Gold Rush over 150 years ago, the prospect of finding gold has driven men to great lengths. For the hardscrabble 49ers, the search for gold meant wading in riverbeds to sift gold from the rushing water. Today, gold is mined from the earth, since most of the surface gold – known as alluvial gold – has been found. The gold-mining process is intricate and multi-faceted, tying cutting-edge technologies with old-fashioned determination.

Finding Gold: Eureka!

While gold exploration used to be a matter mostly of "boot and hammer" prospecting, gold mining today is largely a matter of technology. First, geologists use geology maps to look for favorable areas to explore. Ore deposits are not easy to find and many of the ones exposed on surface have already been found. Geologists use the physical and chemical characteristics of the rocks they are looking for to zero in on prospective areas. Once favorable geology is established, remote sensing, airborne and ground geophysics and geochemistry are used to outline targets for drill testing.

Drilling and Engineering: Taking stock

Drilling at these sites brings up rock samples from various locations. These samples are analyzed to determine if any gold exists there, the size of the deposit, and the quality of the gold. Using this information, mining engineers determine if enough gold is under the surface to make the mining worthwhile; the type of mine needed; the physical obstacles to getting to the gold; and what impact a mine would have on the area's wildlife and environment. If the gold is close to the surface, the engineers will design an open-pit mine; if the gold is buried deeply, they will plan an underground mine. (This is into Pre/Feasbility Reports and whether an operation will be economical)

Building a Mine: Be prepared

Before the gold can be mined, an infrastructure must be created. Even if the gold is close to the surface, the simplest open-pit mine can take up to a year to build. In fact, the time between discovering gold and actually bringing it out of the earth can be up to five years. Since mines are often in remote locations, an entire infrastructure – roads, administrative offices, equipment storage areas, even towns, schools and medical facilities – must be built. The plans for the mines must be given the green light by a number of authorities at each level of government. Also, the mining company must put aside money for reclaiming the land once the gold is mined. In all, the preparation process can end up costing hundreds of millions of dollars – before a single ounce of gold is mined.

Mining and Processing: Taking the good from the bad

Ore samples are taken and examined for the metallurgical quality of the gold in order to determine the appropriate processing technique required to remove the gold. The mine site infrastructure includes a processing area where the ore is crushed and undergoes various processes depending on the nature of the associated minerals and then the loose rock is sent to the appropriate processing location. The process for low-grade ore is relatively simple: a cyanide solution is applied to the heap, dissolving the gold, which is then collected. High-grade ore, on the other hand, heads to the grinding mill for a more extensive process. There are several different ore types which require different processes for optimal recovery of the gold. For example:

1. Oxide ore goes directly to the leaching circuit, where cyanide dissolves the gold.
2. Refractory ore, which contains carbon, is roasted at 1000 degrees Fahrenheit, burning off the sulphide and carbon, then heads to the leaching circuit.
3. Sulphide refractory ore, which does not contain carbon, is oxidized in an autoclave in order to separate the sulphide safely, and in an environmentally friendly manner, from the ore, which then enters the leaching circuit.

In the leaching circuit, the gold is extracted from the solution and deposited onto activated carbon, from which the gold is then chemically stripped. The impure gold is then melted into doré bars, which are about 90 percent pure gold. These bars are usually shipped to a refinery where they undergo further processing.

Refining: From 90 percent to 99.99 percent pure

The refining process strips out the remaining impurities from the gold, which is either recycled scrap being upgraded or gold destined to become bullion bars. In the first step, crude gold is melted and treated with chloride, converting remaining metals to chlorides that will drift off the gold. The resulting 99.5 percent pure gold is cast into electrodes known as anodes, which are put into an electrolytic cell. After a current is passed through the cell, the end product is 99.99 percent pure gold.

Reclamation: Giving back the land

After a number of years, the gold reserves in a mine will be exhausted. In the old days, a spent mine would be boarded up and abandoned, but nowadays a reclamation project returns the land, as much as possible, to its previous natural state. The project follows the plan submitted to government authorities before the mine was built, which details the strict guidelines the company will follow, during the life of the mine and its closure, to protect wildlife and the surrounding environment. The reclamation project will include such things as planting trees and grass, and returning wildlife to the area.

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Taken from :
http://www.barrick.com/Investors/AboutGold/HowGoldisProduced/default.aspx

Introduction

Hi everyone and welcome to the Mining 101 Blog.

The way we will set up this blog is as an information hub for new and potential investors new to the mining world. Please feel free to leave comments or e-mail us for inquiries.

A short disclaimer about our group - we are a group of investors and not professional analysts or mining experts. However we have experience in the mining companies and their operations - hopefully this unique perspective should offer much insight for newer investors looking to grasp some basic concepts.

Many of our first posts will be in a brief Question and Answer format with a short comment about technical abbreviations and links to reference materials.

Our approach is a simple and common sense approach instead of sea of jargon that most layperson will see when you Google "Mining". With that said, let's get started.

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What is mining?

Simply put, it's the various methods and activities involved in extracting minerals and precious metals from the earth. More on the steps and processes later, but here's an overview about the mining industry and the different type of companies.

Exploration vs Production stage?

Like their definition suggests, exploration companies explore the property they have through geological studies, surveys, and drilling holes in the ground (not too surprising, right?). All this is for a hope that the land is filled with precious metals that's worth more than the land purchase price!

COST : Lower - employing geologists to fly to a remote piece of land to drill holes and do surveys
RISK : Higher - since there the possibility there could be low grade metals or not economical enough to turn into production
RETURN for investors : HIGHEST - putting your money down for shares of an exploration company where the initial survey results look good is a risky investment, but with that comes a huge return potential. If the drilling results look good - your investment can easily jump as the speculation (no concrete samples) is now turning into a solid estimate.

Production is more complicated. Typically companies with production properties will have purchased or brought a property from exploration to production stage. This means building a mine or production facility and bringing workers to process the mined rocks to get the metal portions out (more on extraction methods later).

COST : HIGH - Alot more expensive - infrastructure and building a mine and facility to refine metals once the raw rocks are dug from the ground
RISK : MEDIUM - still potential of risk from variables like operation (flow and management), worker availability, infrastructure, economic production schedule (it costs money to maintain the camp each day!)
RETURN : LOWER - once the metal is refined still dependent on the grade and commodity prices. (Gold's at $900+/ounce today ref - Kitco)

With that said, what do many junior mining exploration companies do?

The cost of mining is quite high. If you take a look at the income statements and production budget for many major mining firms such as Barrick it can easily reach into the hundreds of millions. (in Barricks' 2008 case - $400 Millions!). In contrast, their exploration budget tallies to $200 Million for the 2008.

Jr. Mining companies tend to acquire property with cash, option agreements, or joint venture projects in an attempt to eventually do a survey/drill study to see the potential of deposits of metal in the ground. Given the lower cost, you will see $3-5 Million a year for exploration efforts for Juniors compared to the Barricks, Yamanas, and Kinross of the mining world.