A shortage of new gold discoveries makes those miners with large, proven, and cheap resources more important, writes Michael Murphy of New World Investor.

There’s an interesting problem in the gold mining industry. In spite of very heavy exploration drilling, the established miners are not finding much gold.

Current global mine production is about 85 million ounces, but the industry hasn’t found that much gold in each of the last 12 years. In 2006, the industry spent $2.5 billion to find 60 million ounces of gold. In 2009, they spent $5 billion, and found about 35 million ounces of gold.

The largest gold mine ever found was discovered over 50 years ago in Papua province, the larger of the two Indonesian provinces that make up the western half of New Guinea. The largest gold-producing region in the US, the Carlin Trend in Nevada, was found over 45 years ago.

There haven’t been any comparable discoveries since, and many of the more promising discoveries are in high-cost areas due to bad weather, bad geography or bad politics.

The world is running out of gold. The miners we are invested in are working in Mexico, Nevada, Idaho, and the Yukon—easy areas to mine and, in the case of Mexico, relatively cheap. I’ve deliberately kept you out of questionable areas like West Africa and China (it looks like Silvercorp may be falling apart) and exotic recovery schemes like undersea mining.

We can take advantage of the activity in those areas with Energold (EGDFF), without owning any miners. Energold is a buy under $4.50 for a $10 target price in mid-2012. [Energold closed for the weekend around $4.30—Editor.]

Otis Gold (OGLDF)
I had several requests to list the pink-sheet symbols for Canadian stocks. Please, always check the volume of trading, the spread and compare the pink sheets price to the current price on the main exchange before you buy on the pinks.

Always use limit orders, and don’t be in a hurry to buy or sell. Buy Otis under 65 cents for a first target of $1 by mid-2012. [Otis trades around 35 cents at the moment—Editor.]

Silvermex (GGCRF) is another on the pink sheets. Buy Silvermex under 80 cents for a 90 cent target in 2011 and $1.50 in 2012. [Silvermex just barely peaked above 60 cents at the tail end of last week—Editor.]

Paramount Gold & Silver (PZG)
The miner jumped when it filed a new 43-101 showing a multimillion-ounce gold resource at Sleeper.

They have 2.6 million ounces of measured and indicated gold and another 25.3 million ounces of silver. There are another 1.1 million ounces of gold and 8.2 million ounces of silver inferred. The company has contracted for a Preliminary Economic Assessment of Sleeper, the next step in proving up the resource, that should be completed early next year.

As I read the data, Sleeper is not an especially rich resource—the cut-off grade was only 0.2 grams of gold per ton, and the average was around 0.5 grams per ton. But there is a heck of a lot of it, and Nevada is a relatively cheap place to open-pit mine. Management said: “Sleeper is emerging as one of Nevada’s largest undeveloped gold resources.”

In the 10-K they filed last Monday, they said they are budgeting $3 million for drilling at Sleeper over the next 12 months. Results will be used for an updated 43-101, probably about this time next year.

In Mexico, they plan to spend $9.25 million drilling. There will be a new 43-101 here, too, that includes information about the last six months’ drilling. The filing time was not specified. They are also doing a Preliminary Economic Assessment of Mexico, due in the first half of 2012.

At the end of the June fiscal year, they had $21.4 million in cash, and said: “We believe that our working capital surplus will enable us to meet our anticipated drilling for several fiscal years and operational needs, subject to any costs that we incur with respect to the acquisition of additional mineral properties.”

Buy PZG under $4 for my $15 target when the company is acquired, possibly in 2011. There is a lot of good news coming, including the announcement that the Sleeper waste dumps contain $70 million worth of gold to fund the company. [PZG traded at $2.71 to close the week—Editor.]

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