Gold Miners , Struck by Price Decline , Lose Their Shine
---
Companies Close High-Cost Operations
And Postpone Opening New Sites
By Mark Heinzl and Carlos Tejada
07/29/1997
The Wall Street Journal
Page C32
(Copyright (c) 1997, Dow Jones & Company, Inc.)
Corrections & Amplifications
NEWMONT MINING Corp.'s gold reserves would fall about 25% using a gold price of $300 an ounce, not $400 an ounce as was stated in some editions yesterday. (WSJ July 30, 1997)
The gold-mining industry, already having lost its luster, is facing even dimmer prospects.
Earlier this year, the slumping price of gold forced gold miners to begin slashing expenses. But with gold's latest 6% tumble since mid-May, mine closures and layoffs are next, and fire sales and consolidations are expected to follow.
Today, many mines expend significantly more dollars to produce gold than they get returned in revenue, and several companies' planned mine developments no longer make economic sense. "It's cheaper to buy bars of gold and put them in the pit," one analyst says half-jokingly.
Gold closed at $329.20, up $3.10, yesterday on the New York Mercantile Exchange, down from $370 in January. The Toronto Stock Exchange's Precious Metals Index has fallen 27% since the beginning of the year.
Analysts say only a few gold producers, such as Toronto's Barrick Gold Corp. and Denver-based Newmont Mining Corp., are able to turn a solid profit, mainly because of low mining costs. Many North American gold companies are reporting losses or break-even results for the second quarter. Some are being forced to make hard decisions about which mines to keep running.
Royal Oak Mines Inc., for example, said it is closing its Hope Brook mine in Newfoundland this week, a few months earlier than planned. The Kirkland, Wash., gold miner also recently decided to shut its Colomac mine in Canada's Northwest Territories by year's end. Operating costs at both mines have risen to more than $400 an ounce this year, and Royal Oak's remaining mines have costs at or above the current price of gold.
Royal Oak, for now, has a hedging program that provides $395 per ounce of gold it produces. Many mining companies use private hedging contracts to lock in the selling price for future gold production. But Royal Oak is losing money even with its hedging program, which will run out by year's end. After then, its revenue will reflect the spot price of gold.
Royal Oak officials say the company's relatively low-cost Kemess gold and copper mine in British Columbia will sharply improve the company's high-cost structure once production begins next year. But some analysts are worried about both Royal Oak and its Kemess mine. The company has fallen short on some of its past production and cost forecasts, says Victor Flores, a mining analyst with Marleau Lemire Securities Inc. in San Antonio, Texas. He also is concerned that Royal Oak will spend more to build Kemess than its estimated $306.9 million.
Some mining projects have been put on hold to conserve cash. Take, for instance, Echo Bay Mines Ltd., of Englewood, Colo. "Echo Bay's not going out of business," Mr. Flores says, but most of their plans for expansion are on hold. Echo Bay has yet to obtain financing for some projects that had figured prominently in its growth plans, and the company is already sustaining sizable losses.
With gold prices so low, Echo Bay's Paradones Amarillo project in Mexico, originally scheduled to open in late 1998, "appeals neither to bankers nor does it appeal to us," admits Echo Bay Chairman Robert Leclerc. The project's total production costs are expected to be $338 per ounce, so the company is considering delaying the project "pending a better gold price," he says.
Echo Bay's Aquarius project in Ontario is proceeding, but the company is considering slowing the pace of construction and hoping for the price of gold to rebound later, he says. Aquarius is expected to cost a total of $316 an ounce to operate.
In the meantime, Echo Bay is looking to cut costs, and "if we have opportunities to do the same work with a smaller number of people," Mr. Leclerc says, "then we must and will eliminate positions."
Last week, Echo Bay announced a new mining plan at its 50%-owned Round Mountain gold mine in Nevada, including a shift away from lower-grade material, which Echo Bay says will increase the mine's cash flow but reduce its reserves. If the price of gold trades in a $300 to $325 range for several years, however, "our future is very bleak. So, too, is the future of many others in the industry," he adds.
Gold's latest tumble is more ominous for the mining industry than previous downturns, analysts say, because mining costs in major gold-producing countries have been rising world-wide. Since 1993, when the price of gold rebounded from a low of $330 an ounce, 1996 weighted-average operating costs at gold mines climbed $24 to $237 an ounce in the U.S., $31 to $293 in South Africa and stayed flat in Canada, according to Gold Fields Mineral Services Ltd. in London. And some analysts aren't expecting gold prices to rebound soon, despite its recent uptick. "The biggest issue is fear of further central-bank selling," says Lehman Brothers analyst Peter Ward, who sees prices remaining in the low $330s this year and at $330 next year.
Although gold producers are targeting high-cost mines for possible closure, they are reluctant to pull the trigger because of the expense of shutting a mine and the possibility that prices will snap back. "There's always a danger of overreacting," says Michael A. Steeves, a Homestake Mining Co. spokesman. The company's Homestake mine in South Dakota, which is deeper and older than the company's other mines, is the top candidate for closure if gold remains low, he adds.
"If gold were to freeze where it is now," says Marc D. Cohen, a PaineWebber Inc. gold analyst, 25% of the world's production could be phased out, starting at higher-cost mines overseas. Indeed, Toronto's Caledonia Mining Corp. last week suspended production at its Barbrook mine in South Africa, laying off 320 workers. The mine's operating costs were over $330 an ounce.
Pressure also is mounting on companies to re-evaluate their gold reserves, which investors use to help determine stock prices. Some companies, such as Newmont Mining, use a $400 selling price of gold to calculate reserves. "As an industry leader, I think [Newmont] has to reconsider their reserves," says David Neuhaus, a mining analyst with TD Securities Inc.
A Newmont spokesman says the company isn't considering such a move. Revaluing the company reserves at, say, $300 would reduce its reserves by 25%, the spokesman says, but Newmont doesn't plan to begin mining its higher-cost reserves for several years.
In fact, Newmont is confident gold prices will improve. Yesterday, the company bought 1.1 million ounces of gold on the spot market to use to fulfill hedging contracts it inherited from an acquisition earlier this year. In effect, the move rids the company of the vast majority of its hedging position, leaving it to sell its production on the open market. "We think this is a time to reassert our confidence in the metal," said Ronald C. Cambre, Newmont's chairman and chief executive, in a statement. Newmont will recognize a $100 million gain during the next 12 months.
For companies lucky enough to have cash in the till, the current falloff in gold prices and gold stocks has an upside. Toronto-based Kinross Gold Corp. is "looking aggressively at opportunities" for acquisitions, and the company's cash hoard of $200 million is earmarked for that purpose, says Robert Buchan, Kinross's chief executive officer. Many companies that are shopping around their undeveloped gold discoveries have lowered their asking prices, but "the economics become more challenging" to build a mine at those sites, Mr. Buchan says.
Getchell Gold Corp. of Englewood, Colo., is viewed by some on Wall Street as a potential takeover target. The company's current production costs are more than $400 an ounce, but by next year the company expects its Turquoise Ridge in Nevada, which has resources of some 4.5 million ounces of gold, to begin production at $250 an ounce, according to G.W. Thompson, Getchell's president and chief executive. Though the company says it has enough cash to develop the property, one Wall Street analyst says it could become an acquisition target if the price of gold weakens the company during the second half of the year. Mr. Thompson declines to comment on the takeover talk, but notes the large producers "have to continue to grow to stay in business."
Another possible takeover target is Bema Gold Corp., or its 33%-owned subsidiary Arizona Star Resource Corp., both in Vancouver, British Columbia. Bema Gold owns 49% and Arizona Star 51% of Cerro Casale, a big, low-grade copper and gold deposit in Chile. A Bema Gold spokesman says two-dozen mining companies have examined Cerro Casale and are at "a very serious stage" of deciding whether to negotiate a deal for control of the project.