They’ve never had it so good

A recent article about gold producers hedging their bets by selling their output forward (N.M., Oct 3/88) helped to bring home the point of how much better off mining companies seem to be today compared with yesteryear.

Taking advantage of what the markets of the ’80s have to offer, producers of all sizes have been able to sell their gold forward and/or arrange gold loans for capital financing, at prices in excess of today’s spot or cash price and well above their cash operating costs. Consolidated Gold Fields reports the average cash operating cost for Canadian gold producers in 1987 was $209(US) per oz, up $10 from the previous year, while the same cost for all producers in the non- communist world in 1987 averaged $227, an increase of $39 from 1986. Remarkably, the average price of gold rose by $79 in 1987, to about $447.

Obviously then, most gold mining companies are in a position to make money at today’s price, the current situation being far different from the days when the precious metal was pegged at $35 per oz, an arbitrary figure which ruled the market between 1934 and 1968. Earlier times

Forty years ago, in the late 1940s, Canadian gold mine operators were in dire straits. “Most of the several hundred gold mines in Canada operating in 1940 had closed or had begun to feel the pinch by 1949,” wrote T. P. Mohide (with the Ontario Ministry of Natural Resources at the time) in his 1981 publication “Gold.” The latter part of the Second World War had been particularly hard on the mines.

Reacting to the situation, the federal government in 1952 enacted the Emergency Gold Mining Assistance Act, under which mine owners could apply for a grant to improve the return of their operations. While the legislation stayed in force until 1976, it was rendered redundant after the price of gold was allowed to float in 1968. Freed of any restraints, the gold price rose steadily over the next few years, peaking at $850 in January, 1980.

Getting back to the financing side of modern-day mining, Metals Economics Group of Halifax, in a recent report on gold loans, lists a number of factors it believes will affect the future of bank-related mine funding.

Mining projects, the research organization writes, are growing in both size of operation and mine life, while also becoming more metallurgically complex. Also, some of the larger projects are being developed in regions of the world (Pacific area, South America) considered less stable politically than North America and Australia.

“The gold industry has become increasingly internationalized in recent years, and the trend is expected to continue, with more companies branching out overseas and more multinational partnerships being formed for new project development,” writes the company, which expects the trend towards larger loans will continue.

It also foresees banks trying to reduce their risks by seeking “more equity-related positions such as stock in companies, net profits interests or structured participation in gold price rises.”