|
Gold miners punished by climbing cash costs Investors unenthused as sector debates exploration vs. acquisition Gary Park Petroleum News Calgary Correspondent
These are among the most baffling of times for gold mining companies and investors.
The price of bullion has soared and global investment strategists have projected that sustained weakness in the U.S. dollar will keep those prices high.
Yet the producers have seen their profit margins slip — victims of rising energy prices, exploration costs and wildly fluctuating currencies.
Of Canada’s “big four,” only Newmont Mining has reported higher earnings than a year ago, but even it is forecasting a 4 percent hike in operating costs in 2004.
Barrick Gold and Placer Dome — two of the world’s leading miners — have offered only a bleak outlook, triggering a sharp fall in their shares prices. Placer challenged by costs Placer issued its second warning of higher costs, estimating the total cost of mining gold will be US$270-$275 an ounce, up from its March guidance of US$265 and US$255 at the start of 2003.
“Our big challenge is to speak to the pressure that we’re getting from costs,” CEO Jay Taylor told a conference call. “We are aggressively focusing on that and I look forward to better results at the back end of the year.”
Placer posted a second-quarter profit of US$66 million, but that was reduced to US$11 million once unusual items and tax gains were stripped away — a drop of 66 percent from the same period of 2002. Barrick earnings flat Barrick, North America’s second-largest gold miner, which stumbled over energy prices, exploration costs and operational problems that cut into production, showed flat earnings of US$59 million.
Like Placer, its results were helped by tax recovery and a non-hedge derivative gain.
“While we still have operating issues to resolve at some properties, over all our portfolio of operations turned in a good quarter,” said Barrick President and CEO Greg Wilkins.
Barrick is boosting its exploration budget to US$125 million this year from US$104 million in 2002 and Placer is increasing spending to US$75 million from a previous budget for the year of US$60 million.
For Barrick, the strategy is clear: It’s cheaper to expand reserves through exploration than acquisition.
“The best way to add shareholder wealth is to find it yourself, as opposed to buying it,” Barrick’s Australian Vice President Greg Lang told the Diggers and Dealers conference in Australia last week. “There are very few cheap acquisitions.”
Since 1990 it has cost Barrick an average US$11 per ounce to grow its reserves through exploration, in contrast to the US$45 an ounce South African-based AngloGold is paying Ashanti Goldfields of Ghana for 22 million ounces of reserves. Expansions through acquisitions On the other hand, Doug Pollitt, a Toronto analyst, said big companies have generally been expanding through acquisitions, which “speaks volumes” for the challenge of actually finding gold.
Meanwhile, investors are left scratching their heads. Since the start of 2002, the price of gold has risen 11 percent, but the Standard & Poor’s/Toronto Stock Exchange gold index is up just 7 percent.
Merrill Lynch analyst Michael Jalonen said that investors will continue to give shares a wide berth until miners can prove that they are able to capitalize on a robust gold price. He said premium valuations will likely escape most producers until the sector can show “solid and sustainable profitability growth, especially with a higher price.”
But, after a decade of responding to low gold prices by exploiting the top of their mines, most producers are now faced with going deeper into the ground — a recipe for more operational breakdowns, lower concentrations of gold and upward spiral in costs.
| 