In recent Penny Sleuths, I’ve talked about the surging demand for gold and gemstones from China and India. It’s a powerful force that I believe will support the price of these and other precious commodities – and penny shares can be a great way to play this trend.
But did you ever stop to wonder why it is that people in these countries have to import all of these luxuries?
With diamonds, the answer is simple: they can only be found in certain geological conditions. These conditions don’t exist in China or India. So rich Chinese and Indians rely on imports from diamond producing countries for their bling.
But both China and India do have their own gold mining industries. In fact, China is the world’s top gold producing country.
Today, though, I want to talk about India, whose gold industry is not what it used to be. Let me explain.
The mining zone at the centre of India’s 19th century gold rush
Gold deposits are known to occur in the Indian states of Karnataka, Andhra Pradesh, Rajasthan, Madhya Pradesh, Jharkhand and Kerala. But the only gold mine of any scale in India is at Hutti.
India produces just 100,000 oz of gold per annum but imports have risen by 1,015% in the last 20 years. Now, thanks to the efforts of one small company, India’s own gold mining industry could be set for a revival.
Last Friday, Kolar Gold (KGLD) listed on AIM with a value of £40m. It is on the trail of what chief executive Nicholas Spencer described to me as one of the biggest and best opportunities in the global gold mining industry.
We need to go back in time a bit to pick up the story.
Millions of years ago southern India was joined to Australia. India has an Archaean geological belt formation that is comparable to that of western Australia. But while this geology has allowed western Australia to become one of the biggest gold mining regions, nothing much is happening today in India.
But once upon a time it did. In fact, gold has been mined in central southern India for centuries, getting under way in earnest in the late nineteenth century. With the Californian and Australian gold rushes on the wane, the Kolar region, some 70 kilometres east of Bangalore, started to attract prospectors from far and wide.
The colonial era was at its height and the British ran the show. The London engineering firm of John Taylor & Sons pulled together all the licenses and set about building a major mine. While Indian labourers toiled on what were known as the ‘Golden Carpets’, the British enjoyed their creature comforts. With smart clubs and elegant bungalows, they recreated a little corner of Surrey. Tennis, polo, billiards and golf provided entertainment. Summer balls and Christmas festivities were the social functions. And with a landscape and climate reminiscent of home, Kolar was christened ‘Little England’.
It was not some quaint village though. The population of Kolar rose from 7,000 in 1891 to 38,000 ten years later. A railway was built to link the town with Bangalore and Kolar became the first city in Asia to get electricity, generated by the Shivanasamudra waterfall.
The Kolar gold mine eventually produced 25 million ounces of gold at the very respectable average grade of 15.9 g/t. But its glory days were over. In 1956, Indian independence saw it revert back into Indian hands and the operation went into gradual decline, suffering from a lack of capital investment and proper management. Today, although the giant tailing heaps and barren bungalows hint at past glories, the mine lies derelict.
This AIM-listed company could hold 20 million ounces of gold
But it could still hold another estimated 10 million ounces of gold and Kolar Gold would like to get its hands on it. Spencer has spent the last six years assembling licenses over gold mining prospects to the north and south of Kolar, along an 80 km stretch.
Thanks to the efforts of partner, Geomysore Services, Kolar already has plenty of survey data and is now ready to start drilling. It wants to put four drills to work in north and south Kolar, and it has already seen some encouraging early results.
Kolar believes that this could become a really major gold province, and draws comparisons with the huge Kalgoorlie field of western Australia. According to an independent expert assessment, “the Kolar Belt is one of the most prospective and yet underdeveloped Greenstone Belts in the world…The exercise is akin to an evaluation of the entire Eastern Gold fields of western Australia prior to the commencement of current activities in the late 1970s”.
Kolar believes that it could find as much as 10 million ounces of gold in the licenses that it has acquired and a similar amount within the old mine, assuming it can get its hands on it. For that, it will require the acquiescence of India’s notorious bureaucracy.
A recent change in the mining law is designed to speed development of the industry. But what counts as speed in India may still prove to be slow going. Still, this is a project that could achieve real scale. For me, that is an important criterion for investing in penny shares.
I’ve got a number of gold stocks on my watch list – I’m sure you have too. With its share price down some 20% since its listing last week, Kolar Gold is under pressure. But I’ll be watching developments closely in the months ahead. If the gold market starts moving ahead once more and Kolar comes up with the goods, it could get interesting. Stay tuned.
• This article is taken from Tom Bulford’s twice-weekly small-cap investment email
The Penny Sleuth .