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Gold/Mining/Energy : Gold Price Monitor

GDXJ 97.99

+0.3%

4:00 PM EST

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To: goldsheet who wrote (63208)	2/2/2001 7:16:56 PM
From: russwinter	Read Replies (1) of 116753

Couple points on the ability of miners to produce 54 million oz and still survive beyond this decade. First reserves in total are stated as 700 million oz.. Further the majority of majors are using 300-325 assumptions to base their reserves on. The last time I checked (this afternoon) spot gold was 266. There is a world of difference between 266 and 300/325. I wish I could value my extensive junior portfolio that way. Most of my holdings (being in the top quartile cost wise), would be immensely economical. Using 300/325 is slight of hand and misleading. It is even more misleading (and dangerous)to use percentage of reserves (such as 25%)as a basis for hedging policy. And you can see the "little" admissions creeping into the quarterlies about declining revenue on a per oz basis. The reason is simple, the higher priced low to mid 300's hedges are being delivered into and are being replaced at sub-300 prices. A plan vanilla contract for early 2003 delivery runs about $288. It is going to get tougher to make a go of it when this hedging heroin fix is weakened. When one looks at the cost structure of the majority of this industry, you just can't see how they are going to inexpensively come up with replacement reserves on location. I would go so far as to argue that since mining is a risk activity that demands a double digit rate of return, that perhaps reserves should be valued on a 250 basis (currently) to accurately reflect capital invested, exploration costs and production costs. The present approach is not much different than Amazon.com's badly flawed "revenue generation, without real profit" model. One of the reasons I believe production could drop 5 to 10% in the next two years (if prices stay below 300)is the care and maintenance issue. Mines with higher cost structures aren't worth the investment to fix if there are any problems. And there will be more recurrent problems. Syama and Refugio are examples, and like the old slum tenement with broken waste lines and a bad electrical system, when things go wrong, they'll just walk away as the rents don't cover the bills.

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