canoe.ca
July 21, 1998
Modern miners learning to cope with low
gold prices
TORONTO (CP) -- Once, gold's hypnotic glimmer had the world in a
trance, when the promise of riches was lusted after by pirates and princes,
crooks and Klondikers.
Today, those dreams appear long gone, wiped from the imagination by the
Asian crisis, disinterested central bankers and the largest gold mining scandal
of the modern era.
With gold prices at less than $300 US an ounce, an entire industry bent on
survival has been forced to mine profits from the cold new realities of a
not-quite-so-precious metal.
Canada's largest producer, Barrick Gold, showed Tuesday it is adapting
successfully to the new gold market, reporting a sharp jump in profits and
continued progress in lowering operating costs at its mines.
And No. 2 producer Placer Dome Inc. expects another quarter of good
results when it reports its finances next week.
"Our new strategic plan assumes $300 gold into the foreseeable future,"
said Hugh Leggatt, a vice-president with the Vancouver company.
"We're not relying on (gold) to come back," Leggatt said. "If it does, all the
better, but we're not saying we're just hunkering down until it turns around.
"We have to operate profitably at these levels."
That means cutting costs, hedging gold sales and pursuing only those
projects that promise a high grade of ore. It's a philosophy that seems to be
working -- for the companies that can afford it.
Placer reported net earnings of $17 million in the first quarter of 1998, up
from $14 million during the same period in 1997, thanks in large part to
production costs that were slashed by $41 an ounce.
The company's second-quarter results, due Monday, will also reflect
Placer's "lower-cost profile and significant hedging gains," Leggatt said.
Barrick, meanwhile, earned $142 million US in the first six months of 1998,
up 23 per cent. For Toronto-based Barrick, the key was to cut operating
costs to the bone -- they plunged to $157 an ounce for the six-month
period, compared with $191 during the first six months of 1997.
In addition, Barrick's hedging program, which locks in gold contracts at
fixed prices, has served to protect the company from the recent freefall.
Barrick's program has so far this year yielded extra revenue of $152 million
at an average spot price of $400 US an ounce.
Barrick is setting the pace for an industry that is learning how to manage
amid low gold prices, said John Kinsey, a portfolio manager with Caldwell
Mutual Funds in Toronto.
"They're by far and away the best," he said. "They're proactive, they're
very, very good at getting their costs down, and their production is going up.
"They certainly set the standard."
Asia's troubled economy has hurt gold prices not only by soaking up
demand, but also by triggering a massive flow of capital into U.S. money
markets, experts say.
Gold -- effectively a currency as well as a commodity -- has been shunned
in favor of the more lucrative instruments available to Asia-wary investors in
the U.S.
In addition, all the uncertainty has prompted the world's central bankers to
seek out more attractive backing for their currencies, one of gold's traditional
roles.
It's been an even rougher ride for smaller companies, especially junior
explorers looking for investment capital to finance the hunt for gold.
The Bre-X Minerals scandal, which saw billions of dollars in share values
wiped out when the tiny Calgary company's fabled Indonesian gold find was
exposed as a hoax, all but dried up the available exploration capital.
Still, not everyone is convinced that the industry is going to have to contend
with low gold prices forever.
"This is a normal part of what happens," said John Ing, president of Maison
Placements Canada in Toronto.
When gold was worth more than $400 an ounce, institutional investing
reached a fever pitch and companies spent far too much money on
borderline exploration and mining projects.
Now, companies that were overextended are disappearing, larger
producers are consolidating and, eventually, the price will recover, said Ing.
"It's going to shut down a lot of the uneconomic production, and that's
bullish for the industry," he said.
The quality of assets will prove to be the secret of survival for anyone in the
gold industry, whether a major player or merely a junior, said Chris
Bradbrook, a senior mining analyst with Yorkton Securities in Toronto.
"It all comes down to assets," he said. "You have to have good assets,
regardless of size, because that's what determines profitability, the ability to
generate cash flow, fund your capital programs and grow the company."
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