Gold industry losing its glitter as prices plunge, mines close
Analysts fear worst may be yet to come if EU nations sell off
Monday, August 3, 1998
By Mark Mackinnon
The Globe and Mail
Gary Autet promised himself he'd never work in a uranium mine. A career gold miner, he felt the money wasn't worth the health risks posed by the unavoidable exposure to radiation.
For more than 20 years he kept that promise to himself -- until this year. In January, the weakest gold prices in 18 years closed Echo Bay Mines Ltd.'s Lupin gold mine in the Northwest Territories, putting Mr. Autet and 500 others out of work.
Five months later, the Ponoka, Alta., resident finds himself working to sink a shaft at a uranium mine near McArthur River in northern Saskatchewan. For the first time in his career, he can't find a job in the gold industry. And he isn't alone.
"There's no one I know who's working in gold right now," he said, listing off where some of his co-workers at Lupin ended up: construction, selling used cars, mining uranium. "I always figured that if I had to work uranium over gold, I may as well quit mining, but that's the way jobs are right now."
It's a grim picture for those in the gold industry and one that doesn't look likely to improve any time soon. The price of the yellow metal has staged a mild recovery from the pit of $278 (U.S.) an ounce it hit in January. But it has continued to stumble along since then in the $290 and $310 range -- this year trading below the psychologically significant $300 mark more often than not. Friday it closed at $286.30.
It's a price that has taken its toll on the Canadian gold mining industry. Last year, Royal Oak Mines Inc. of Kirkland, Wash., closed its Colomac gold mine in the Northwest Territories and the Hope Brook mine in Newfoundland at a combined cost of more than 500 jobs. The company followed that by laying off more workers at its Giant mine near Yellowknife and mining only higher-grade ore in an attempt to reduce costs.
The list of casualties goes on. Englewood, Colo.-based Echo Bay closed Lupin in January. Vancouver's Miramar Mining Corp. laid off 130 people at its Con mine near Yellowknife. Placer Dome Inc. of Vancouver is closing its Detour Lake mine in Northern Ontario next year. Last September, Toronto's Barrick Gold Corp. announced it was closing five of its 10 mines.
Of 63 gold mines in Canada operating at the beginning of 1997, when gold was trading around $370, no less than 14 have closed. Exploration for new mines, in many cases, has also ground to a halt.
And more bad news could follow if the current gold price persists. Royal Oak told one newspaper earlier this year that the life of the Giant mine would be measured in "months not years," if low gold prices persisted, although the company now says it has no plans to close the mine. Echo Bay executives say their company may go under if a $300 gold price is a long-term reality.
Analysts -- even many onetime "gold bugs" who believed the commodity would never fall as far as it has -- aren't optimistic that the price will rebound in the near future. "If there's a significant move coming for the gold price from where it is, it's going to be down rather than up," said Peter Ward, a gold analyst with Lehman Brothers Inc. in New York. Just last September, he was predicting the price would hold in the $330 range for 1998.
Why the pessimism these days? Primarily because gold seems to be losing its traditional role as a hedge against inflation. Several countries have created a selection of inflation-indexed bonds, which -- unlike gold -- are guaranteed to earn interest, no matter what the inflation rate is. The strength of the U.S. dollar has also caused problems for gold and has emerged as the currency hitch of choice.
Complicating matters, countries around the world have started selling gold to meet budgetary targets, and the Asian financial crisis has reduced demand in an area where previously it was strong.
And there are more storm clouds on the horizon. The European Union said last week its new European Central Bank will hold just 15 per cent of its foreign exchange reserves in gold -- a move that has set the industry on edge.
Some gold watchers had predicted the bank would keep up to 30 per cent of its estimated $55-billion reserves in gold, especially considering the large gold reserves of the EU's member states. But the central bank's president, Wim Duisenberg, burst that bubble when he said the bank will hold no more than about 870 tonnes of gold in its reserves, worth about $8.3-billion at recent prices. That leaves between 11,000 tonnes and 12,000 tonnes in the vaults of EU member countries -- about five years' worth of annual mine production worldwide.
Analysts are split on what happens next. Some, such as John Ing, president of Toronto investment dealer Maison Placements Inc., say the European countries with the largest gold reserves (Germany, Italy and France) will hang on to their gold and the price will slowly recover as markets stop worrying about a massive glut of European gold. "I don't expect a heck of a lot of gold will come on to the market."
Other analysts disagree. They argue that the "emotional" attachment some had to gold is a thing of the past.
"There's really no benefit to [EU member states], keeping additional supplies of gold above and beyond what the European Central Bank requires," said Mike Sorba, chief economist for Quantum Financial Services in Vancouver. "I would say it's almost for sure" that the countries will sell their gold.
What happens to the gold price next depends on how the EU decides to manage what is now their surplus gold. If they decide to hold it, analysts say the yellow metal could stage another rally and push over the $300 mark for good. But if they, like Australia, Switzerland, India and others, have given up on gold, the commodity could be in for another dive.
How low could it go? Most analysts suggest that $260, the average cost of production worldwide, is the next logical floor -- although one suggested that gold would be overvalued even at that price, and that its true worth, like silver's, only has two digits before the decimal point.
Even if it doesn't fall that far, some of Canada's higher-cost mining operations will feel the pinch if gold starts to slide. Graham Eacott, vice-president of investor relations for Royal Oak, said gold at $260 would cause havoc in an industry where Canada is the world's fourth-largest producing country (behind South Africa, the United States and Australia).
"I think if gold were to go down to the $260 level, there would be some more mine closures. It would be very difficult to operate at those prices," Mr. Eacott said. A spree of mergers and acquisitions would follow, he added. "But the downside is very limited on gold. I think the worst is probably behind us."
GOLD'S GLITTER FADES
Recent gold projects closed or suspended
Company, mine Area Jobs Closure date
Royal Oak Mines Hope Brook, 280 August
Couteau Bay,Nfld.
Raymo Processing Rambler Tailings, 15 January
Baie Verte,Nfld
Ming Minerals Stogler Tight/Mining, 75 January
Baie Verte,Nfld
TVX Gold, Golden Knight Casa Berardi, 196 February
Casa Berardi,Que
MSV Resources Copper Rand, 360 November
Chibougamau,Que.
MSV Resources Portage, * September
Chibougamau,Que.
Battle Mountain,Cambior Silido, 118 July 25
Rouyn-Noranda,Que.
Barrick Gold Corp Golden Patricia, 180 March
Pickle Lake,Ont.
Rea Gold Corp Bissett (San Antonio), 240 Dec. 16
Manitoba
Golden Rule Resources Komis, 80 April
LaRonge,Sask.
Teck Corp Afton-Ajaz, 150 July
Kamloops,B.C.
Royal Oak Mines Colomac, 240 October
Indin Lake,NWT
Treminco Resources Ptarmigan and Tom, 41 August
Yellowknife
Echo Bay Mines Lupin, 500 Jan.'98
Contwoyto,NWT
Source: Natural Resources Canada
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