This is almost as good as pessimistic as the article in FT in Jan that headlined "Gold is Dead." Can we say bottom? I love it!!!!!!!!
Gold Industry Tries to Dig Itself Out
By WILLIAM R. LONG
NY Times
DENVER -- The gilded dome of the Colorado state capitol makes a fitting crown for this city as the capital of the nation's gold mining industry. But the dome has a lot more luster than the industry these days: Gold prices are bumping along at levels too low for many of Denver's mining and exploration companies to make money, and there is no relief in sight.
Companies are closing mines, putting new projects on hold, laying off employees and cutting costs to try to ride out the hard times. Big losses are eroding cash reserves and share prices are in the doldrums.
And Denver's companies are not alone: The industry depression is worldwide, and companies in gold-mining countries like Australia and South Africa are in even worse shape because their costs are higher.
Many in Denver's gold industry were unprepared for a prolonged slump in gold prices. "What I think we all expected is that if gold prices went below $300, it would be for the short term," said Michele Stell, managing director of the Denver Gold Group, a trade association for the 60-odd mining companies that call Denver home.
But the spot price of gold in London, which spent most of the 1990's in the $375-to-$400 range, started declining steadily about two years ago; it has been near or less than $300 an ounce since November, and sank to an 18-year low, less than $280, in January. A modest recent rally left the spot price at $308.50 on Friday, enough for the most efficient companies, like Newmont Gold, to eke out a profit, but still dangerously low for many others.
The troubles of Echo Bay Mines Ltd., one of the largest gold companies based in the Denver area, are typical of the hard times in the United States industry.
So far this year, Echo Bay has suspended operations at one mine and scaled down at another, cut its exploration budget in half and slashed spending on new projects by 85 percent. It has laid off 800 of its 2,100 workers, cut home-office jobs to 35 from 112 and let go three-fourths of its exploration staff. It expects to produce only 500,000 ounces this year, down from 721,000 in 1997.
Those and other cost-cutting measures, combined with the company's policy of hedging gold prices by buying and selling gold futures, "have positioned us to weather a continued period of low gold prices," said Peter Cheesbrough, senior vice president and chief financial officer of Echo Bay. He said the company had already sold its entire 1998 production in the futures market for at least $340 an ounce, considerably more than recent spot prices. "Right now we're conserving cash," said Robbin Lee, manager of investor relations.
Including one-time charges for layoffs and other cost-cutting measures and a $362.7 million write-down of assets, Echo Bay lost $420.7 million in 1997.
Echo Bay's situation is grim, but better than that of some other American producers. Pegasus Gold Inc. of Spokane, Wash., had just expanded its Mount Todd mine in Australia when prices slipped too low for its output to be sold profitably, said John Pearson, vice president for investor relations at Pegasus. The company put the mine in mothballs last September and took a $353 million charge; the closing put Pegasus in default on a line of credit needed to finance a new mill.
Pegasus cut its payroll nearly in half, to 600 from 1,020, sold its jet and otherwise trimmed costs, but its stock sank anyway, from $8.50 in February 1997 to $1.60 at the end of the year. The company filed for Chapter 11 protection in January and the American Stock Exchange delisted Pegasus soon after.
Pegasus was soon joined by more casualties. The Dakota Mining Corporation was delisted from the American Stock Exchange in February, because its earnings sank below the exchange's criteria. Royal Oak Mines Inc. technically defaulted on $44 million in notes on March 17 and said it might have to suspend its nearly completed $470 million Kemess gold and copper project in British Columbia. Royal Oak got a reprieve later in March when it lined up $120 million in new financing.
"The market is in just a very ugly mood," said Dr. John Dobra, an economist and director of the Natural Resource Industry Institute at the University of Nevada in Reno. With prices so low, he said, about 60 percent of the world's production would be occurring at a loss, assuming 1996 production costs.
"The industry is in trouble if the gold price stays at $300, even $325," said Daniel McConvey, a gold-mining analyst at Goldman, Sachs. Mr. McConvey is predicting an average price this year of $310 an ounce; Ronald Londe of A.ÿG. Edwards & Sons is more pessimistic, projecting $275 to $285 an ounce for the next 12 months and perhaps longer.
Gold's heyday seems long past. In December 1980, after years of monetary instability and high inflation, prices rose briefly to $850 an ounce, and gold was seen as a haven.
But today, with inflation fast asleep, major investors and the central banks of many countries no longer want to stockpile gold. In 1997, Australia and Argentina sold most of their gold reserves. Other causes of low prices, analysts say, are depressed demand in East Asian nations and uncertainty over European gold policy."As long as inflation stays under control," Mr. Londe said, "gold really has nowhere to go."
Many producers are responding as Pegasus and Echo Bay did, by cutting production. Mines that would have produced about 150 tons of gold in 1998 have been closed in recent months, according to David Christensen, a gold analyst with Merrill Lynch in San Francisco. "We're going to need about 400 tons of permanent mine closures before the price is stabilized," Mr. Christensen said.
Such contraction would be painful for the shakiest companies but would leave the lowest-cost producers, like Newmont, relatively unscathed. Newmont spent an average of just $250 to extract each ounce last year; nonproduction costs like exploration, interest payments and overhead add $50 or so an ounce, leaving Newmont a slender profit even at today's depressed prices.
Newmont Mining, which owns 94 percent of Newmont Gold, has tightened its belt, too, laying off 500 people. But "we're not in danger of closing any mines," said Doug Hock, a company spokesman.
Companies large and small, said Ms. Stell of the gold trade association, "are in a survival mode."ÿÿ |
