I came across an article in the FT called “Gold mining: Squandered opportunity” and the sentiment expressed in it reflects the over exuberance and waste which has been endemic in not only the gold industry but in many, many commodity companies over the last few years. When prices were high, management took their eye off the ball on their cost base and went all guns blazing developing trophy assets in far flung, high risk areas around the world. The mission was more ounces, more tonnes and whatever it took. They payed themselves enormous salaries and that was kind of fine when their companies share prices were rising fast, but now with the prices decimated in many cases, investors are seriously questioning these “fat cat” packages.
In the last 10-15 years the big gold companies enjoyed a double whammy of a rising gold price and relatively easy, low cost extraction.
Costs have gone out of control with the right people being eagerly sought with high salaries and equipment costs rising sharply.
The temptation has been to develop what would have marginal projects a few year when the gold price was much lower. The example of Barrick Gold’s, Pascua Lama, 5,000 metres up in the Andes between Chile and Argentina has been cited as a classic example of the mess. With a $5 billion write down caused by escalating costs and environmental problems, the project has now been moth balled. The company went to investors in November with a $13 billion rights issue.
Political problems and government interference appear to be an ever rising problem. The temptation for developing countries to take a larger slice of the pie from the mining companies is evident with part nationalisations and rising tax bills, a phenomenon coined as “resource nationalism”.
Deutsche Bank says the four largest North American gold companies – Barrick, Newmont, Goldcorp and Kinross – are worth less than in 2006, when gold was half today’s price of around $1,245 per oz. The value of AngloGold Ashanti, the South African miner that is the world’s third-largest producer by output, has fallen by more than 40 per cent over the same period.
I wrote a piece a couple of weeks ago on the impact of the falling gold price on asset valuations and the expectation of gold reserves having to be cut as they become uneconomic to mine.
It is clear the big gold miners, in common with large iron ore, metals producers have become addicted to a model which in the face of pressured prices no longer seems fit for purpose. There was news this week that Goldcorp bid C$2.6bn for Osisko Mining.
Goldcorp’s offer of 0.146 of its shares and C$2.26 in cash is seen as supporting its cash flow and gives its precious ounces in the relatively safe haven of the Americas. Osisko’s main producing asset is Malartic in Quebec which has production of around 500,000 ounce. 44 per cent of Goldcorp’s production would come from Canada, compared with about 34 per cent. Osisko is now sitting at C$6.23, compared with the C$13.50 that its shares used to be when Goldcorp divested a 10% holding in 2011.
The problem with acquisitions is that many companies have diverse assets around the world and the economies of scale likely to be achieved are in many cases limited.
Evy Hambro, from BlackRock World Mining Trust is quoted as saying “Many gold companies have been growing for the sake of growth, often financed with share issues – and that has ultimately watered down returns for investors. Companies have been going backwards rather than forwards from an investor point of view.”
In common with the oil companies, gold is getting harder to find and more costly to extract. Reserve replenishment has been hampered by lower grades, with grades falling on average from 2.6g per tonne in 2002 to 1.1g today. 800 million ounces was added to global gold reserves and resources in the decade and a half up to 2012 – but 1.2bn oz was mined during that period.
Miners belonging to the World Gold Council, have now started using a measure called “all-in sustaining costs” of production which is seen as a much more accurate assessment of the cost of mining extraction and production. This measure has highlighted some of the substantial challenges that miners are facing in bringing their product to market at a profitable price.
Sentiment is as bad as it was in the late 1990’s when a fraud involving Bre-X, a group of companies in Canada was exposed. A subsidiary, Bre-X minerals reported it had discovered an enormous gold deposit at Busang, Indonesia in 1995 which sent its shares soaring.
Originally a penny stock, its stock price reached a peak at CAD $286.50 (split adjusted) in May 1996 on the Toronto Stock Exchange (TSE), with a total capitalisation of over C$6 billion. The company collapsed in 1997.
Busang’s gold resource was estimated by Bre-X’s independent consulting company, Kilborn Engineering to be approximately 70 million troy ounces Reports of resource estimates of up to 200 million troy were claimed.
Crushed core samples had been falsified by salting with gold that has a wide variety of characteristics that had been subjected to mineralogical examination by Bre-X’s consultants. The salting of crushed core samples with placer or supergene gold constitutes the most elaborate fraud in the history of mining.
The fraud began to fall apart in March 1997 when Filipino Bre-X geologist Michael de Guzman died by falling from a helicopter in Indonesia. A week after De Guzman’s death Freeport-McMoRan, a prospective partner in developing Busang, announced that its own due-diligence core samples, led by Australian geologist Colin Jones, showed “insignificant amounts of gold”.
A third-party independent company, Strathcona Minerals, was brought in to make its own analysis. They published their results on May 4, 1997: the Busang ore samples had been salted with gold dust. The lab’s tests showed that gold in one hole had been shaved off gold jewelry though it has never been proved at what stage this gold had been added to those samples.
Contrarian Investor UK
IMPORTANT: The posts I make are in no way meant as investment suggestions or recommendations to any visitors to the site. They are simply my views, personal reflections and analysis on the markets. Anyone who wishes to spread bet or buy stocks should rely on their own due diligence and common sense before placing any spread trade.
by contrarianuk
Gold mining companies facing uphill battle to repair damaged credibility
Jan 15, 2014 at 6:37 am in Market Commentary by contrarianuk
In the last 10-15 years the big gold companies enjoyed a double whammy of a rising gold price and relatively easy, low cost extraction.
Costs have gone out of control with the right people being eagerly sought with high salaries and equipment costs rising sharply.
The temptation has been to develop what would have marginal projects a few year when the gold price was much lower. The example of Barrick Gold’s, Pascua Lama, 5,000 metres up in the Andes between Chile and Argentina has been cited as a classic example of the mess. With a $5 billion write down caused by escalating costs and environmental problems, the project has now been moth balled. The company went to investors in November with a $13 billion rights issue.
Political problems and government interference appear to be an ever rising problem. The temptation for developing countries to take a larger slice of the pie from the mining companies is evident with part nationalisations and rising tax bills, a phenomenon coined as “resource nationalism”.
Deutsche Bank says the four largest North American gold companies – Barrick, Newmont, Goldcorp and Kinross – are worth less than in 2006, when gold was half today’s price of around $1,245 per oz. The value of AngloGold Ashanti, the South African miner that is the world’s third-largest producer by output, has fallen by more than 40 per cent over the same period.
I wrote a piece a couple of weeks ago on the impact of the falling gold price on asset valuations and the expectation of gold reserves having to be cut as they become uneconomic to mine.
It is clear the big gold miners, in common with large iron ore, metals producers have become addicted to a model which in the face of pressured prices no longer seems fit for purpose. There was news this week that Goldcorp bid C$2.6bn for Osisko Mining.
Goldcorp’s offer of 0.146 of its shares and C$2.26 in cash is seen as supporting its cash flow and gives its precious ounces in the relatively safe haven of the Americas. Osisko’s main producing asset is Malartic in Quebec which has production of around 500,000 ounce. 44 per cent of Goldcorp’s production would come from Canada, compared with about 34 per cent. Osisko is now sitting at C$6.23, compared with the C$13.50 that its shares used to be when Goldcorp divested a 10% holding in 2011.
The problem with acquisitions is that many companies have diverse assets around the world and the economies of scale likely to be achieved are in many cases limited.
Evy Hambro, from BlackRock World Mining Trust is quoted as saying “Many gold companies have been growing for the sake of growth, often financed with share issues – and that has ultimately watered down returns for investors. Companies have been going backwards rather than forwards from an investor point of view.”
In common with the oil companies, gold is getting harder to find and more costly to extract. Reserve replenishment has been hampered by lower grades, with grades falling on average from 2.6g per tonne in 2002 to 1.1g today. 800 million ounces was added to global gold reserves and resources in the decade and a half up to 2012 – but 1.2bn oz was mined during that period.
Miners belonging to the World Gold Council, have now started using a measure called “all-in sustaining costs” of production which is seen as a much more accurate assessment of the cost of mining extraction and production. This measure has highlighted some of the substantial challenges that miners are facing in bringing their product to market at a profitable price.
Originally a penny stock, its stock price reached a peak at CAD $286.50 (split adjusted) in May 1996 on the Toronto Stock Exchange (TSE), with a total capitalisation of over C$6 billion. The company collapsed in 1997.
Busang’s gold resource was estimated by Bre-X’s independent consulting company, Kilborn Engineering to be approximately 70 million troy ounces Reports of resource estimates of up to 200 million troy were claimed.
Crushed core samples had been falsified by salting with gold that has a wide variety of characteristics that had been subjected to mineralogical examination by Bre-X’s consultants. The salting of crushed core samples with placer or supergene gold constitutes the most elaborate fraud in the history of mining.
The fraud began to fall apart in March 1997 when Filipino Bre-X geologist Michael de Guzman died by falling from a helicopter in Indonesia. A week after De Guzman’s death Freeport-McMoRan, a prospective partner in developing Busang, announced that its own due-diligence core samples, led by Australian geologist Colin Jones, showed “insignificant amounts of gold”.
A third-party independent company, Strathcona Minerals, was brought in to make its own analysis. They published their results on May 4, 1997: the Busang ore samples had been salted with gold dust. The lab’s tests showed that gold in one hole had been shaved off gold jewelry though it has never been proved at what stage this gold had been added to those samples.
Contrarian Investor UK
IMPORTANT: The posts I make are in no way meant as investment suggestions or recommendations to any visitors to the site. They are simply my views, personal reflections and analysis on the markets. Anyone who wishes to spread bet or buy stocks should rely on their own due diligence and common sense before placing any spread trade.