Distinction blurs between gold and base metal producers

Vancouver — Boom times in China and India have base metal companies flashing growth-charts not seen since the heady days of the Western World’s post-war baby boom. The rally has even prompted some gold companies to diversify, as metal demand in the world’s two most populous nations is being driven more by the need for basic amenities than by the desire for luxury goods.

Asia’s emerging economies have also altered the investment strategies of institutional funds. Many have moved into commodities in a big way, despite their inherent risks. The Ontario Teachers’ Pension Plan and popular resource funds managed by Merrill Lynch, JP Morgan and other big names have all posted impressive gains based on investments in companies that produce base metals, and raw commodities such as coal, iron ore, uranium, among others. Even so, there’s little consensus as to how long the good times will roll.

Some resource fund managers believe the rally could continue for decades now that market reforms and an emerging middle-class are taking hold in China, India and other emerging Asian economies. Others seem more cautious, or less convinced, and continue to favour gold stocks as a hedge against weakness in the U.S. dollar and inflation brought about by soaring energy costs.

Bulls argue that metal demand in Asia is powered by billions of citizens in need of better homes, transportation and infrastructure systems, and power delivery (blackouts and brownouts are still acute in parts of Asia), as well as by the pent-up desire for basic consumer goods. They believe China’s efforts to cool its overheated economy would depress metal demand, but only over the short term.

Bears argue that the Asian rally could be cut short by a global, oil-induced recession of the sort that brought the post-war boom to a grinding halt in the early 1970s.

Base metal companies were hit hard by that recession, and many took shelter in gold, which fetched as much as US$800 per oz. in the early 1980s. Base metal miners Noranda (nor-t) and Teck, a predecessor of Teck Cominco (tek-t), both became major gold producers by acquiring rich deposits in the Hemlo region of Ontario. Base metal producer Placer merged with gold-producer Dome Mines to become Placer Dome (pdg-t), which subsequently shed most of its base metal assets to become a “pure-play” gold company. Gold companies were investors’ darlings for much of 1990s, until the dot-com craze blew them (and even blue-chip stocks) out of the water.

Today, with both precious and base metals back in play, mainstream institutional investors seem to be hedging their bets by investing in both sectors. Even some precious metal funds are diversifying. London-based Vanguard Precious Metals reported earlier this year that it had four diversified mining companies among its top 10 holdings but only one pure-play gold company. A fund manager sent tremors through the industry when he publicly scolded gold companies for paying more attention to bankers than to investors and for focusing more on generating book-ounces than returns of investment capital.

Among Vanguard’s top 10 holdings were conglomerates such as Rio Tinto (rtp-n), a historic base metal miner that now produces almost 4 million oz. gold annually, along with iron ore, copper, coal, diamonds, uranium, and even salt. Others are BHP Billiton (bhp-n), Anglo American, and Australia’s WMC Resources (wmc-n) (now being courted by BHP Billiton). The balance includes producers of diamonds, coal and uranium.

Although it is too early to signal an industry trend, gold companies are not shying away from diversification opportunities. Barrick Gold (abx-t) — as pure as pure-play gold companies come — welcomed Falconbridge (fl-t) as its 50% operating partner at the Kabanga nickel deposit in Tanzania.

Barrick acquired Kabanga through its 1999 takeover of Sutton Resources. The main attraction was the Bulyanhulu gold deposit (now a producing mine), and expectations were that Barrick would put Kabanga on the block. (Former Sutton Chairman James Sinclair even offered to buy Kabanga from Barrick, but was turned down.) Instead the company explored the nickel deposit and boosted inferred resources to 26.4 million tonnes grading 2.6% nickel before engaging Falco as a partner. The partners envision an underground mine that would handle 2 million tonnes annually and produce up to 35,000 tonnes nickel-in-concentrates.

While Barrick’s limited exposure to nickel was barely noticed by the street, Wheaton River’s approximate 40% exposure to copper last year helped sink the company’s proposed takeover of African gold-miner Iamgold (img-t). Shareholders rebuffed the offer, and gold companies made competing bids on the grounds that a merger with Wheaton would dilute Iamgold’s status as a pure-play gold company.

Wheaton then proposed a merger with gold miner Goldcorp (g-t), only to have Glamis Gold (glg-t) make a competing bid on the grounds that Wheaton was not a pure-play gold company. Unfazed, Goldcorp President Robert McEwen countered that copper was “an opportunity,” and urged shareholders to accept the merger deal, which they did early this year.

Diversified miner Teck Cominco has long resisted street pressure to be a “pure-commodity play,” and even has several advanced gold projects on its drawing boards. The company has a track record of using industry downturns to acquire whatever it believes it can mine at a profit, no matter how unfashionable. The company picked up coal properties in British Columbia when few others were interested. The mines are now generating robust profits, as are the company’s copper and zinc operations, now that both metals are in demand in Asia.

Teck Cominco’s diversification strategy is reflected in its latest quarterly earnings: $205 million, compared with $96 million a year earlier. The company also doubled its dividend to shareholders.

Placer Dome, however, was rapped in the early 1990s for taking on copper-gold projects that re-duced its gold profile. It was rapped again in the late 1990s for making high-profile gold acquisitions (Getchell Gold, for example) that failed to provide returns on investment.

Placer Dome still has several copper-gold projects, which, if developed, would boost its copper production for decades to come. Among them is a 51% interest in Cerro Casale, a large gold-copper porphyry deposit in the Andean Highlands of Chile. The company’s share of measured and indicated resources is estimated to be 13 million oz. gold and 3.3 billion lbs. copper.

Despite having been deemed uneconomic by a 2000 feasibility study, Cerro Casale was re-examined in an updated study completed in early 2004. An open-pit mine producing almost 1 million oz. gold and 130,000 tonnes copper per year over 18 years was proposed. Capital costs were estimated at $1.65 billion, and cash costs, US$115 per oz., net of copper credits.

A final feasibility study this year will be followed by a decision whether or not to build a mine by year-end. The company will also decide the fate of its previously acquired Mount Milligan copper-gold deposit, near Williams Lake, B.C., based on the results of an updated feasibility study.

The steady, if not strong, outlook for base metals has many companies investing more exploration dollars in the global search for opportunities. Teck Cominco, for example, is looking for porphyry copper or copper-gold properties amenable to open-pit mining in northern Chile, southern Peru, northern Mexico, and Arizona. Other important exploration targets are zinc oxide deposits in Mexico, and Namibia, and zinc sulphide deposits in Alaska and Western Australia.

Last year the company spent $42 million on global exploration, about half of which was spent by other parties on properties in which Teck Cominco holds interests or bac
k-in rights.

A significant porphyry discovery was made on the company’s wholly owned Zarfrandal property in the Paleocene copper belt of southern Peru. The property was staked in a 2003 reconnaissance program. Subsequent work outlined a 2.5-km-by-1-km area of surface mineralization and alteration typical of a porphyry system.

Highlights of recent drilling are 110 metres grading 1.25% copper and 77 metres grading 1.75% copper within broader intervals of more than 250 metres of 0.7% copper. More drilling is planned for this year.

Teck Cominco also plans to test its San Vicente project in Mexico, where previous drilling returned encouraging intersections, including 20 metres of 32% zinc, and grab-samples (from regional programs) grading 42% zinc. Several new properties were staked in the surrounding region.

Farther afield in Western Australia, Teck Cominco and partner Noranda are exploring their jointly owned Lennard Shelf zinc project. Work is focused on the Palijippa prospect, where previous drilling resulted in the discovery of carbonate-hosted zinc mineralization. The best result from that campaign was 10.5 metres grading 11% zinc.

Now that the merger between Noranda and Falconbridge is a virtual fait accompli, the companies have integrated their global exploration teams, which are intent on finding and acquiring new nickel and copper deposits. Zinc is another commodity of interest.

Base metals are enjoying a rebound; however, gold remains the most popular exploration target in the world today, according to a study by Metals Economics Group.

Of the US$3.8 billion spent in 2004, gold accounted for more than half of total spending. That total, however, is still 40% less than the peak in 1997, when the yellow metal attracted almost US$3 billion in allocations, or about 65% of total spending.

Base metal spending, on the other hand, only slipped 23% below its peak of US$1.2 billion in that same industry-watershed year.

— The author is a former editor of The Northern Miner and currently works as a business reporter and scriptwriter based in Vancouver.