Bosses of Gold Paint With Broad Brush
By Jim Jones
06 Feb 2007 at 12:13 PM EST
resourceinvestor.com
CAPE TOWN (ResourceInvestor.com) -- The bosses of the world’s major gold companies may be enthusiastic protagonists of the metal they mine, but they remain realistic and pragmatic even in the midst of a roaring commodities boom.
They have to be. Mining by its very nature calls for investment decisions that can stand for years and that will survive the ups and downs of commodity price shifts decades hence.
Certainly, many of the easy gold resources (if ever they seemed easy at the outset) have been snapped up or mined out. Nowadays, new resources - whether gold, metals or oil - have to be found in remote, difficult regions where jurisdictions may not be as accommodating as those in the developed world.
This was made abundantly clear by Barrick’s [NYSE:ABX; TSX:ABX] South Africa’s managing director, Warwick Morley-Jepson, at Mining Indaba 2007 in Cape Town on February 5.
Barrick, with 26 operating mines around the globe is using geographic diversification to mitigate risk. But it is also not shy of being pro-active when dealing with governments.
African countries, Morley-Jepson said, must let transparency evolve if they are to attract investments. Countries have to compete for the investment dollar, and African nations have to show that they are safe investment havens.
The sub-text to the address to delegates of Newmont Ghana Gold’s [NYSE:NEM] VP Worldwie Exploration Jeffrey R. Huspeni was that it can take a lot to attract companies back into regions that they have earlier abandoned.
Newmont is happy to be back in Africa, Huspeni said, but, as he pointed out, this return to gold ventures in Ghana comes after the earlier disposal of investments elsewhere on the continent. Ghana has become critical in Newmont’s search for new gold resources - in 2006 it provided 32% of the company’s new reserves.
AngloGold Ashanti [NYSE:AU] CEO Bobby Godsell spelled out the modalities of operating in Africa which provides 77% of his company’s production, 79% of its reserves and 80% of its resources.
To an extent echoing Huspeni, Godsell pointed out that while gold prices have risen, so, too, have the costs of producing each ounce of gold and of finding reserves to replace those that are exploited each year.
Godsell’s concern was left for taxation. Fair tax levels are to the benefit of miners and governments, but n its totality. In any relationship between governments and mining companies, the burden of “hidden” taxes needs to be on the table.
If miners are expected to provide infrastructure that should, rightly, be the responsibility of government, then official tax rates should be adjusted accordingly. The same goes for the miners’ provision of services to local communities – the social benefits that give miners their social licence to mine.
Ian Cockerill, the CEO of Gold Fields [NYSE:GFI], concurred with Godsell. He said that Gold Fields’s aim is to maintain a balance between its South African and other operations. But, as he put it, managing risk rather than avoiding it is the approach to be adopted. Gold mining is a risk-taking business. And operating in Africa calls for the miners to balance their relations with local communities and regional and central governments.
Mark Bristow, the CEO of Randgold Resources [Nasdaq:GOLD], painted with a broad brush indeed. While we are in the middle of gold’s longest bull run in history, he asked, are difficulties being masked. Gold’s latest run, Bristow said, appeared to have come as a surprise to many – flat prices in the $200/oz range for years meant that mining companies cut down sharply on exploration and development.
Making good on that deficit presents problems. Revenues from several well-known African mines have failed to cover capital costs and capital expenditure. Now, perhaps more than ever, Bristow said, when miners are carrying out feasibility studies, they need to take a close look at the real returns that are likely.
Stakeholders, particularly governments, expect rewards and are not endowed with infinite patience. The danger is, then, that is a mine under-performs and fails to pay expected taxes, governments can respond by imposing royalties – royalties that then dissuade miners from investing more.
Harmony Gold’s [NYSE:HMY] CEO, Bernard Swanepoel, underscored his company’s investment requirements in South Africa, where new opportunities are limited.
Harmony’s various brown fields developments are reckoned to offer internal rates of return (IRR) ranging from 23% to 55%. But these projects are all extensions to existing mines – Harmony’s new mines are largely located in Papua New Guinea. |
