TORONTO (Dow Jones)--Global bullion production figures indicate the currency
crisis has led to a hold-up in production cutbacks in the gold mining
industry, despite weak bullion prices.
Analysts said both the gold price and the Toronto Stock Exchange's gold
sub-index dropped sharply Thursday partly on fears that continued weakness in
the Australian dollar against the U.S. dollar will boost gold supply and sales
out of that country.
Gold-producing countries whose currencies are weakening against the U.S.
dollar, such as Australia, Canada and South Africa, realize a higher price for
gold in their local currency because bullion is priced in U.S. dollars.
According to CRU International Ltd., a London-based research firm, total
gold output rose slightly in the first half of 1998, to 1,025.6 metric tons
from 991.4 tons a year earlier, even though the gold price fell about 11% over
the same period. The figures are based on estimated gold output in South
Africa, Canada, the U.S., Australia, Latin America and other, unspecific
countries.
As gold prices drop, gold producers are forced to close high-cost gold
mines. However, the recent depreciation in the currencies of gold-producing
countries has allowed gold producers to keep high-cost mines open, which has
helped to undermine the gold price, noted Alastair McIntyre, director,
precious and base metals at ScotiaMocatta, a unit of Bank of Nova Scotia
(T.BNS).
Claire Derome, president of Quebec-based McWatters Mining Inc. (T.MCW), said
her company is currently realizing a price of more than C$450 per ounce of
gold, because its expenses are in Canadian dollars and Canada's currency is
weak against the U.S. greenback.
"We get the same price (today) as we got last year when gold was selling at
$325 an ounce," she said.
In New York, the October contract for gold is currently trading at about
$275 an ounce.
The Canadian dollar is down about 11% so far this year against the U.S.
dollar, and currencies in Australia and South Africa have also depreciated
significantly against the U.S. dollar.
But weak currrencies aren't the only factor behind the slow pace of
production cuts. Many producers have achieved prices significantly above the
spot price of gold because of their hedge programs, fund managers said.
Hedging involves selling gold forward at prices above the spot price.
(MORE) DOW JONES NEWS 08 -28 -98 11:24 AM
In addition, some gold companies are mining only high-grade ore to
counteract the weak gold price and maintain production levels, Claire Derome,
president of McWatters Mining Inc. (T.MCW), said.
This practice, known as "high-grading," allows producers to reduce per-unit
costs and increase the amount of gold produced per metric ton of material
mined. Citing currency weakness, hedging and high-grading, Veronika Hirsch,
president Toronto-based fund manager Hirsch Asset Management Corp., said she
isn't surprised at the lack of global gold production cuts.
However, "I'm really surprised to see that there hasn't been more
consolidation on the company front" in the gold sector, Hirsch said.
Assuming the gold price stays low, Hirsch expects gold companies to start
cutting back production next year. By then, more companies will have sold the
bulk of their hedged bullion, and ended any high-grading activity, she
predicted. High-grading isn't a sustainable practice because it accelerates
the depletion of a mine's reserves.
By next year, Hirsch added, if gold prices stay low, companies will choose
to close dying mines instead of spending to find new reserves.
Derome at McWatters noted that, at least in Canada, gold producers already
have started cutting production in response to the weak gold price.
"This year, the Canadian (gold mining) industry has closed out 15% of
(total) production capacity," and actual production is down 8%, Derome said.
The closures have focused on high-cost mines, she said.
The executive also pointed out the projected annual worldwide gold
production growth rate has slowed dramatically to about 1%, from 4% to 5% in
previous years.
Derome, though, acknowledged that the industry, boosted by pretty good
revenues despite the weak gold price, has been slow to consolidate. "Everyone
wants to be a consolidator," she quipped. "To find a mine, develop it, to
bring it to production (is) a really long process; and when you have something
(with long-term value) which is working, you don't want to get rid of it." she
added. At the same time, McWatters is making acquisitions. On Wednesday, it
announced plans to merge with Minorca Resources Inc. (T.MAR), its largest
sharholder and a mine investment company. McWatters was partly attracted to
the deal because it will boost its cash reserves to take advantage of
"opportunities" arising from low gold prices.
-By Ben Dummett; 416 -943 -7807 (END) DOW JONES NEWS 08 -28 -98 11:25 AM |
