Bema Gold Corp.
Dow Jones Newswires -- July 27, 1999
DJ Chilean Gold Mines Undaunted By Central Bk Gold
Sales
By Andrea Welsh
SANTIAGO (Dow Jones)--The Bank of England's July sale of 25 tons of gold reserves has stirred
up concerns that gold-producing countries such as Chile might be forced into closing mines.
But many Chilean producers say they can weather Britain's gold dumping and a series of other
completed or anticipated sales by central banks worldwide, which have been weighing heavily on the
precious metal's price. Gold hit a 20-year low in July, and is now languishing around $254 an ounce.
Some Chilean companies say they have advantages over other producers that will help them ride out
the storm.
Gold is a significant export product for Chile, which produced 2.2% of the world's supply in 1997,
even though the country's metals sector is focused primarily on copper.
The Chilean gold miner's misfortune comes just as the country's copper sector is possibly turning the
corner on its own price woes. The industrial metal is currently trading around $0.75 a pound, after
having been cut in half over the previous 18-month period, to a low of $0.61 in March.
It took a run of mine closings elsewhere in the world to break the back of the copper price slump.
Whether Chilean gold producers might benefit from similar shutdowns of foreign mines remains
unclear. Meanwhile, Chile's largest gold mining concerns are saying they are holding fast to
production targets - at least into the year 2000.
Cash Costs: The Litmus Test
Chilean mining outfits have already taken measures to reduce their cash costs for mining. Dayton
Mining Corporation's (DAY) Andacolla mine produced 92,548 ounces of gold in 1998 at a cash
operating cost of $241 an ounce. Dayton says it expects to trim 1999 cash costs down to $190.
Last week, El Refugio mine said its cash costs over the next five years will be cut to $220 an ounce,
from 1999's projected $240. Refugio anticipates an increase in annual output over the same period,
to 240,000 ounces, compared to this year's estimated 210,000 ounces.
Bema Gold Corporation (BGO), co-owner of El Refugio with Kinross Gold Corporation (KGO),
ceded day-to-day operations of the mine to Kinross in June, taking advantage of its fellow Canadian
firm's superior mining technology.
Barrick Gold Corporation (ABX), owner of Chile's Pascua mine, embarked on a more radical
cost-cutting scheme in September 1997, unveiling a plan to close its high-cost Tambo and El Indio
mines in northern Chile. Final shutdown dates are scheduled for the end of this year.
Barrick is now focusing its local production on Pascua, Chile's largest undeveloped gold and silver
mine. The Canadian mining giant forecasts initial cash costs of $125 an ounce, but Pascua has yet to
come on line. Barrick says it's still in the exploration phase, with actual production likely within 24-30
months after a final decision is made.
Vanessa Motto, an analyst for CPM Group, a New York firm that evaluates commodities markets,
warns that exploration budgets and development of downstream projects are likely to be the first to
go at current price levels.
Such a step has already been taken by Placer Dome Inc. (PDG), owner of Chile's La Coipa mine.
The Canadian company suspended construction at its Las Cristinas gold project in Venezuela last
week, citing low prices as a factor in the decision. If and when Las Cristinas does go into production,
the mine is expected to produce 530,000 ounces of gold a year at a cash cost of $155.
William Hayes, president of Placer Dome's Latin American division, said cash costs at La Coipa are
$165 an ounce, well below current market prices. Hayes said that Placer Dome has no plans to
postpone gold and silver mining at La Coipa, the company's principal Chilean property.
"Most Chilean mines have moderate costs, so they wouldn't be the first to close," said gold analyst
Felix Freeman of Scotia Capital Markets. High-cost projects like Tambo and El Indio are already
slated for closure, he added.
Freeman predicted that Chilean mines "should be reasonably safe unless prices stay down around
$240 for an extended period of time."
Forward Contracts Hedge Against Hard Times
Some mines are counting on futures markets sales to help them through the hard times. Bema Vice
President Peter Baxter said his company's gold production is hedged with forward contracts into next
year. But, he added, if prices were to stay low through 2000, "it could affect a lot of operations that
aren't being hurt now because of the forward sales."
Barrick VP of Communications Vince Borg said his company holds forward contracts to match
production targets for the next three years. The company has locked in prices ranging from $320 an
ounce up to $365 an ounce - including expected interest earnings - for 13 million ounces of its
worldwide gold output, Borg said.
But one gold analyst, who asked that his name not be used, pointed out that forward sales don't
guarantee the day-to-day profitability of the mines themselves. While mining corporations can lock in
a price with a forward sale, he said, it doesn't force them to continue operating a high-cost mine since
they can fulfill the contract with gold from another property. Some companies might be hedged at the
level of the mine, he added, "but I don't know of any."
Placer Dome's La Coipa mine, for one, sells all of its output on the spot market, but it doesn't see
current prices forcing production cuts. "Two or three years of (these) prices might affect us, but we
have low-cost operations," said Hayes. "All our mines are cash positive now."
Cash Costs Not Only Factor To Consider
Where cash costs are borderline, other factors can enter into the equation for deciding mine
shutdowns. "There are maintenance costs for closed mines, and lead times for starting up again," said
Dayton VP Diane Thomas, "and there are severance considerations based on Chilean law."
Moreover, gold's price isn't a key factor for some Chilean producers, since their output is only a
byproduct of copper and silver mining. As a result, decisions on whether to curtail or expand gold
production don't normally turn on volatility in the prices of the precious metal.
"We don't even have production targets for gold," said a spokesman for Escondida, the world's
largest privately-held copper mine. "It just depends on what we find." Escondida, which is controlled
by Broken Hill Proprietary Company Ltd. (BHP), produced 77,360 ounces of gold over the first half
of 1999, on par with mining ventures where gold is the main target.
Despite the apparent advantages of Chilean mines, CPM Group's Motto said it's still too early to tell
if soft prices today will evolve into widespread mine closings tomorrow. "It's really a question of how
long weak prices last," she said. "We expect to see prices improve in the fourth quarter and beyond,
into 2000."
Scotia Capital Markets' Freeman had a less optimistic forecast. "We don't expect to see a major
recovery until the middle of next year, maybe the summer of 2000," he said.
Not even company executives shy away from saying these are hard times. "We're making a lot less
than we'd like to" right now, said Hayes, without offering specific details.
Thomas agreed: "With the dollar strong and central bank sales still being announced, it doesn't seem
likely that we'll see a turnaround in the short term."
"But we're still believers in the gold price," she added, "or we wouldn't be in it." -By Andrea Welsh;
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