Kalgoorlie, Australia — Consolidation in the gold mining sector and an optimistic outlook for the price of bullion over the next 18 months had delegates in high-spirits at the 10th annual Diggers & Dealers mining conference in Western Australia.
“We’re in the beginning of a fundamental bull market for gold,”
Driving the rosy forecast of the world’s largest gold producer is the prediction that the U.S. economy will enter into a double-dip recession, causing global stock markets to plunge and the American currency to fall. The result, according to Lassonde, will be a shift from financial assets, such as stocks, into hard assets, namely gold.
“Americans are the best promoters in the world,” said Lassonde. “They promoted their dollar to unsustainable levels, and so far, in this bear market, the U.S. dollar is down 10% against a basket of currencies, and gold is only up 13%.”
He said another reason for gold’s shining future is the decreasing levels of global production over the past few years. As the price of bullion dropped from 1997 through to 2001, the producers cut back certain operations and closed others.
“Nobody makes money with gold at US$275 per ounce, at US$300 the pain is a little less, but this industry needs a minimum of US$325 per ounce to survive,” stated Lassonde. “I’m fully confident we will see US$350 per ounce in the next twelve to eighteen months, and possibly much higher.”
The world’s top gold producers continued to voice opposing views on the controversial topic of gold hedging. Many gold miners have traditionally locked in forward sales to gain a higher released price when the price of bullion falls. However, the extent of the hedging has largely been blamed for gold’s 5-year slide.
“Producer hedging has been the bane of this industry for the past ten years,” said Lassonde. “Hedging became a self-fulfilling prophecy with companies borrowing the gold and then selling it on the market, causing the price to go down.”
But with gold output falling and interest rates at historically low levels, Newmont believes it no longer pays to hedge.
“We have taken one million ounces out of the hedge book already and will be down to six and a half million ounces [hedged] by the end of the year,” said Newmont’s Australian head, John Dow.
Despite foreseeing a stable price for gold over the intermediate term, South African-based gold giant
“Possible devaluation in the [U.S.] dollar and the probable continuation of tensions in the Middle East will support the current price,” said AngloGold’s corporate affairs executive officer, Steve Lenahan. “That is the regrettable thing about gold — we all benefit from other people’s misery.”
In the April-to-June period, AngloGold reduced its hedge book by 2.4 million oz., or 165% of its quarterly production. The hedge book now stands at 10.5 million oz., extending to 2011.
“The U.S. dollar is overvalued, and there’s going to be more pain in U.S. equities,” said Terry Burgess, Chief Executive Officer of Australia’s largest local gold producer, AurionGold. He also stressed that the unwinding of producers’ hedged positions was having a positive effect on the gold market, both in terms of fundamentals and perception.
However, a representative of Canada’s largest producer,
“We manage our hedging program carefully, and currently have 18 million oz. hedged,” said Alex Davidson, Barrick’s vice-president of exploration. “It may be different from other companies, but it has worked well for us.”
Western Australia’s largest gold producer, Sons of Gwalia, concurred with Barrick’s philosophy. “At Gwalia, the objective of hedging has been a risk management strategy,” said Managing Director Mark Cutifani. “Our philosophy is to protect your downside and your returns but try to maintain maximum exposure to the upside.”
The tantalum and gold miner, which took over
Mergers and political risk
With
Australia is no stranger to mining-related mergers. The 1990s saw mostly local companies joining forces, but later in the decade the global players set their sights on the land Down Under, especially Western Australia’s Eastern Goldfields. Normandy Mining (now part of Newmont) had U.S.-based Homestake (now part of Barrick) as an equal partner in Australia’s biggest gold operation at Super Pit, near Kalgoorlie; AngloGold swallowed Australian-based Acacia Resources; and Delta Gold (now part of AurionGold) took North’s stake in the Kanowna Belle mine. Over the past two years, South African and North American players have become even more aggressive. AngloGold’s run at Normandy Mining started a bidding war that ended with Denver-based Newmont winning the final battle. South African-based
However, adding some tension to the latest merger struggles is the uncertainty surrounding South Africa’s mining policies.
Earlier this month, a discussion paper tabled by the South African Department of Mines and Energy proposed that local black empowerment group be given a 51% equity stake in all new mining projects and up to 30% of existing mines, within 10 years. Pointing to the fact that Placer has considerable exposure to South Africa through its Western Areas joint-venture operation, AurionGold took out ads in the Australian newspapers asking shareholders to reject Placer’s bid, citing political risk as one of the reasons.
Although outcry from mining companies with exposure to South Africa prompted the government to backtrack on the proposal, both AngloGold and Placer were careful to assure delegates that a workable compromise would be reached.
“Political risk is very real,” said Lassonde, whose Newmont Mining has no South African exposure, adding jokingly, “I did not know that capital was black and white. . . . I thought capital was green.”
Joining Newmont with no South African exposure and sitting on US$900 million in cash, Barrick’s Davidson said consolidation in the gold sector would continue.
“If the right opportunity presents itself, we are ready to act. When the value is there, either from new discoveries or political shift, an opportunity will come up, and more consolidation will occur.”
Junior explorers
The lack of capital available to junior companies over the past five years has both Barrick and Newmont stepping up the pace of their grassroots exploration programs. In 1996, global exploration expenditures totalled some US$5 billion, but by 2001, the amount had fallen to US$2 billion.
“Historically, we could rely on the juniors to provide a pipeline for new development projects,” adds Davidson. “But those days are over.”
The major has stepped up to the plate by increasing its annual exploration budget for 2002 to US$95 million from US$52 million.
Newmont’s Lassonde sees the plight of the junior explorers in a different light.
“There is no greed out there, and greed is good,” said Lassonde, repeating Michael Douglas’s mantra in the film Wall Street. “We need a new discovery to create the greed, and then, believe me, the money will follow.”
Several companies took exception to Barrick and Newmont’s
statements that junior explorers had failed to deliver new finds. Most notable was Australian-listed Minotaur Resources, which discovered the promising Prominent Hill copper-gold prospect late last year.
“I don’t know if we have a tiger by the tail or a tiger by the throat,” Minotaur’s President Derek Carter told the crowd, “but there certainly is a tiger out there.”
Situated north of Adelaide on Australia’s Gawler craton, Prominent Hill is near the Mount Woods joint venture, which is held 51% by
The property was worked by various operators since the mid 1980s. Poor exposure caused the companies to target magnetic geophysical anomalies representing low-grade copper skarns. Minotaur moved away from the magnetic targets to gravity anomalies more indicative of the iron oxide targets for which it was looking.
“We were looking for hematite, that is, non-magnetic rocks,” said Carter, “and Prominent Hill was one of the gravity anomalies.”
With the first pass of drilling complete, the company has defined a 1-km-long corridor with three distinct styles of mineralization. Eleven of the 15 holes drilled cut significant gold, plus or minus copper. The most impressive intercepts included 1.54% copper and 0.93 gram gold per tonne over 209 metres in hole 5.
During a recent check-assay program, the junior significantly enhanced the gold grades from hole 10, which yielded 31 metres grading 4.31% copper and 0.6 gram gold from 389 metres down-hole, followed by high-grade gold intercepts grading 6.6 grams gold over 16 metres from 486 metres down-hole, 10.6 grams gold over 6 metres from 494 metres down-hole, 11.1 grams gold over 3 metres from 500 metres, and 2 metres grading 49 grams gold from 510 metres down-hole.
Prominent Hill shows similarities with WMC’s nearby Olympic Dam iron oxide copper-gold deposit. However, the host rock from the breccia gold-copper-uranium mineralization at Olympic Dam is granite, whereas Prominent Hill is hosted in sediments.
Another region that has caught the eye of all four of the world’s largest gold miners is the remote Tanami Goldfields in Australia’s Northern Territories. The emerging province has produced 4.1 million oz. gold and has a current resource inventory of 11 million oz.
Historic producer
Discovered at the beginning of the 20th century, the region produced only a minor amount of gold (14,000 oz.) from narrow quartz veins. In the 1970s, Australian-based North Flinders Mines (NFM) re-evaluated the area, eventually defining a mining reserve of 1.9 million tonnes grading 8 grams gold. In 1991, the company was taken over by Normandy Poseidon, which, in turn, became Normandy Mining in 1996. Normandy NFM is the largest single gold producer in the Northern Territory, with gold mining operations in the Tanami region at the Granites, 500 km northwest of Alice Springs, and at Dead Bullock Ridge, a further 40 km to the west. The company made the transition to a large mining operation following development of the Callie deposit in 1998, initially defined as 10 million tonnes grading 7 grams gold. At last count, resources at the underground Callie operation totalled 22 million tonnes averaging 6.1 grams gold.
Normandy continued to advance the area with the development of the Groundrush deposit, 100 km north of the Granites. The 1-million-tonne-per-year operation is expected to crank out 140,000-150,000 oz. gold annually. Last year, the company’s 89% stake in the Tanami operations (the Callie underground mine, as well as the Dead Bullock Ridge, Bunkers and Quorn open pits) added 442,500 oz. to its global production, with total cash costs ringing in at US$144 per oz. Newmont continues to explore the area and recently inked a deal with the region’s second-largest landholder (63,000 sq. km), Australian-listed Tanami Gold, over the Lake Mackay property, south of the Callie operation.
Coyote
Another major to find exploration success in the region is AngloGold. The company acquired the Coyote project, 150 km northwest of Callie, as a result of the takeover of Acacia Resources in 2000. The project, which lies in Western Australia, near the border with the Northern Territories, holds considerable promise. Drilling to date has defined the high-grade Buggsy-Gonzalez structure over an 800-metre strike length to a depth of 250 metres. Significant intercepts included 19 metres at 21.2 grams gold and 11 metres at 75.6 grams gold. In addition, the Sylvestor structure, which runs parallel to the Buggsy-Gonzalez structure, returned 11 metres grading 6 grams gold. Grassroots exploration continued to search for satellite deposits around the Coyote Project, with positive results at the Pebbles and Rabies projects. Additional drilling is planned for this year.
AngloGold believes the Tanami region is a significant gold province with large potential. Under the Central Desert joint venture, held 40% by AngloGold and 60% by Australian-based Otter Mines, the companies have been actively exploring for gold in areas around the Tanami mine since 1989. Situated between the Granites and Groundrush operations, the Tanami mine resumed open-pit extraction in October 1995 and produced nearly 700,000 oz. before grade problems resulted in a closure in June 2001.
Late in 2000, Homestake Mining (which has since merged into Barrick), agreed to inject A$1.5 million into Tanami Gold. Through a private placement, the major picked up at 7.5% stake in the junior. This was an unusual move for a major that generally preferred to put money directly into the ground through joint ventures. However, the deal allows Barrick to get involved in several projects on various highly prospective areas within Tanami’s extensive portfolio.
Sandpiper
Under the Homestake deal, the major can earn up to 25% in three joint ventures or a 51% interest in selected ones by spending A$3 million on exploration over three years. Barrick’s ground includes a significant land package surrounding AngloGold’s Coyote project. The major plans to drill-test numerous targets generated from regional programs in 2001, as well as perform deep reverse-circulation drilling to test for extensions to the Sandpiper and Hawk gold mineralization. Previous results reported back in 1997 by Tanami Gold at Sandpiper included 59 metres at 5.5 grams gold, 17 metres at 7.7 grams gold, and 9 metres at 8.8 grams gold.
BHP and Teck Cominco recently entered the elephant hunt by teaming with Tanami Gold to explore for base metals over a 4,265-sq.-km area, some 100 km north and northeast of Alice Springs. Under the deal, the two majors can earn a 51% stake by spending A$2 million and a further 29% by completing a feasibility study. The alliance aims to target Broken Hill-style polymetallic massive sulphide deposits.
Although gold explorers took centre-stage at the forum, three of this year’s 37 presenters represented nickel miners, with iron ore, mineral sands and coal operations also represented.
Winning the Digger of the Year award was iron ore producer Portman Mining. Despite having a sub-par production year, the company was recognized for its development of the Koolyanobbing project, near Southern Cross in Western Australia. The Dealer of the Year award went to former Normandy Mining boss Robert Champion de Crespigny for having orchestrated the A$5-billion takeover of the company.
Conference Chairman Brian Hurley stated: “The competitive tension facilitated by Robert during the takeover produced one of the more spectacular shareholder enhancements of any takeover in the resources industry seen in Australia.”
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