U.S. gold industry faces concentration

Ownership of the U.S. gold industry is likely to become increasingly concentrated during the next decade as producers grapple with rising interest charges, stringent environmental regulation and a proposed federal royalty, says a recent report by two leading economists. Already, only 15 producing mines account for nearly 50% of all “demonstrated” gold resources, according to an executive summary of The U.S. Gold Industry. (“Demonstrated” gold resources are deposits for which estimates of contained gold have a high degree of certainty.) The report is written by Paul Thomas, deputy director of the University of Colorado’s Economics Institute, and John Dobra, professor of economics at the University of Colorado.

Just two mines — Newmont Mining’s (NYSE) Carlin and American Barrick Resources’ (TSE) Goldstrike — contain almost 25% of the country’s future production.

~~”This is a remarkable degree of resource concentration, given that hundreds of gold mines are known to be in production; over 600 mines and deposits are identified as containing demonstrated resources and thousands of exploration targets have been reported,” At the same time, many of the companies that fuelled last decade’s gold boom are carrying a crippling debt load which could restrict future financing opportunities.

“Although the asset base of the U.S. gold industry is economically viable, some of the companies that currently own these assets are in fundamentally weak positions, owing to high debt servicing requirements and declining prospects for raising new debt and equity capital.” For instance, Echo Bay Mines (TSE) — a front runner during the 1980s’ expansion — has accumulated a total debt of at least US$370 million and has recently written off over US$80 million of its assets. Some analysts believe this bleak financial picture will hinder Echo Bay’s ability to raise capital for its two development projects in Alaska.

The report also focuses on two specific issues that could have an impact on the long-term viability of the industry: the cost of environmental compliance and the effect of proposed federal royalties on gold mining.

Environmental compliance raises production costs at gold mines by at least US$20 per oz., the report estimates. And up-front reclamation bonds, aside from reducing profitability, could prevent many smaller companies from entering the industry altogether.

These added costs, although variable from state to state, are already having an impact on operators across the U.S. At the Flambeau copper deposit in Wisconsin, Kennecott estimates that environmental expenditures will account for at least 70% of the US$25 million required to bring the deposit into production.

~~”A smaller company could not have done it,” remarked Christopher Hinde, editor of The Mining Journal.

A proposed 8% federal royalty on gold mining also looms in the horizon. The report estimates that the minimum impact of such a royalty would be to threaten the economic viability of at least 20% of U.S. gold mines. Average long-term total costs at 22 of the largest mines would increase from US$338 to US$364 per oz.

“Such a tax would impact marginal or small scale producers much harder than more profitable and larger-scale producers, and would also promote the concentration of the industry into fewer and larger companies.”