Gold industry pulls in its horns — Rating service downgrades producers; Kinross to close QR

The gold price plunged again over the past week, crashing through its Feb.

25, 1985, low of US$284.25 on Dec. 9, and causing further concern that gold producers will be forced to close their highest-cost mines.

At least one shoe has dropped: Kinross Gold (K-T) has announced its QR mine, 70 km southeast of Quesnel, B.C., will be placed on care and maintenance starting March 1. QR had been struggling ever since it opened in 1995, with operating costs hovering around US$270 per oz. gold. When a pit wall collapsed this year it cost the mine three months’ production; costs ballooned to US$459 per oz. in the third quarter of 1997.

The shadow cast over gold producers has darkened further, on the news that U.S. rating agency Standard & Poor’s has revised its ratings on a long list of gold companies, headed by Echo Bay Mines (eco-t), Royal Oak Mines (ryo-t), Newmont Mining (nem-n) and subsidiaries Santa Fe Pacific Gold and Newmont Gold (ngc-n).

Echo Bay’s corporate credit rating has been lowered to BB- from BB and its senior subordinated debt has been taken down to B+ from BB-. S&P considers debtors with BB ratings to have adequate capacity to meet loan obligations, but the lowered rating is S&P’s caution that continuing weakness in the gold market could lead to debt problems.

Royal Oak, whose corporate credit had been rated B+, was downgraded to B, indicating an ability to meet current obligations but vulnerability in continued adverse conditions. The revision of Royal Oak’s senior subordinated debt to CCC+ indicates S&P believes Royal Oak will need favorable business conditions to meet those obligations.

The ratings agency placed Newmont and its subsidiaries “on credit watch with negative implications” while reaffirming its BBB+ rating on most of the companies’ debt. S&P rates the companies as having “adequate” capacity to service their debt.

Homestake Mining (HM-N), rated BBB, Battle Mountain Gold (BMG-N), rated BB, and Agnico Eagle Mines (AGE-T), rated B+, were all placed on a ratings watch. Placer Dome (PDG-T), rated BBB, and Amax Gold (AU-N) both had their credit outlook revised to “negative” from “stable.”

Standard & Poor’s did not revise ratings on two notable producers, citing the low costs, significant hedge position and large cash reserve held by Barrick Gold (ABX-T) and the large hedging program in place at Normandy Mining (NDY-X).

Hecla Mining (HL-N) retained its B+ rating on the strength of its silver and base metal production, and Coeur d’Alene Mines (CDE-N), which also produces silver, stayed at B.

Some of the producers that suffered downgrades have already indicated plans to cut away unprofitable operations. Placer Dome announced the QK zone at its Detour Lake mine northeast of Cochrane, Ont., would not be developed at the present gold price, leaving Detour with two to three years of reserves.

Kinross’s other troubled operation, Macassa in Kirkland Lake, Ont., is expected to have costs around US$260 per oz. in 1998. A rock burst in April has led to the suspension of work at deep levels and Kinross must count on successful development of new zones at upper levels of the mine to meet its cost estimate.

Kinross’s Candelaria mine in Nevada, Delamar in Idaho, and Golden Kopje in Zimbabwe also showed costs in the range of US$300-400 per oz. gold this year, making them vulnerable in the present market. The company expects costs at the Hoyle Pond mine in Timmins, which rose to US$209 per oz. gold in the first nine months of 1997, to “decline sharply” as production increases.

The healthiest mines in the Cambior (CBJ-T) stable are its northwestern Quebec trio of Bouchard-Hebert, Doyon and Sleeping Giant, each of which had operating costs per oz. gold in the US$200s. Aurizon Mines (ARZ-T), which holds 50% of Sleeping Giant, has seen costs rise past US$300 per oz. gold at the Beaufor mine, which it shares with Richmont Mines (RIC-T).

Battle Mountain’s centrepiece, the Golden Giant mine near Hemlo, Ont., is still a low-cost producer, but an assortment of troubles are plaguing the company’s Holloway mine east of Matheson, Ont. Recent figures show cash costs over US$330 per oz. gold and production has been interrupted by a grinding circuit failure at Barrick’s adjacent Holt-McDermott mine, which had been custom-milling the Holloway ore.

The gold price is now plumbing levels last seen in 1979, shortly before prices spiked to US$850, a peak from which it rapidly declined to remain roughly in the US$300-500 range until recent months.

The latest blow to the bulls was an announcement that the Central Bank of the Argentine Republic had sold its entire 124-tonne (4 million oz.) gold reserve to buy U.S. treasury bills.

The Argentines are following the lead of a number of other national banks — notably those of Australia, Belgium and the Netherlands — that have liquidated large quantities of gold in favor of U.S. T-bills or debt paper from other major Western governments. Declining inflation figures and a general sense that the G-7 central banks will maintain their policy of fighting currency inflation have encouraged the central bankers to move reserves into interest-bearing securities.

Other central banks may be looking at sales, particularly in light of gold’s present tailspin. Their choice appears to be between accepting a medium-term loss (in U.S.-dollar terms) of 20% to 25% by continuing to hold gold, or to recover 5% to 6% by turning at least some of that gold into interest-bearing U.S. T-bills. With European central banks trying to conform to reserve-holding requirements of the unified European monetary system, the temptation to sell an underperforming asset must be overwhelming.