History repeats itself in Nevada

In many respects, 1999 was a replay of 1998 for Nevada’s mineral industry. The most significant difference was that gold production fell to 8.3 million from 8.9 million oz. — the first production decline since 1995.

The mainstay of the industry, gold mining, remained plagued by low prices. Gold prices in 1999 averaged US$279 per oz., versus US$294 per oz. in 1998. The 1998 price was the lowest in nominal terms (money of the day) since 1978, and, in real terms (adjusted for inflation), since 1972. Therefore, a new low was set in 1999.

In terms of average prices, 1999 saw a worsening of market conditions for gold. Prices were driven down to the US$250-per-oz. range in mid-1999 by a Bank of England announcement that it would sell most of its gold holdings. However, the price rallied when the Bank’s auctions were oversubscribed. Prices were bolstered once again when 15 European central banks entered the “Washington Agreement,” a pact whereby the banks agreed to limit gold sales over the next five years.

The latter prompted a rally that temporarily sent the gold price over US$320 per oz. This price volatility in 1999, as opposed to the narrow range of prices in 1998, has given some analysts cause for guarded optimism. However, sales by the Swiss National Bank and other European central banks under the Washington Agreement will exceed their average sales over the past 10 years; hence these sales will continue to put pressure on prices. The effects of the low price environment in 1999 were essentially the same as in 1998.

Producers sought ways to reduce production costs and maintain cash flow. Cash production costs, which do not include depreciation and amortization, averaged US$167 per oz. in 1999, down from US$179 in 1998 and US$216 in 1997. Weighted average production costs, which include depreciation and amortization, stood at US$228 per oz. last year.

These cost-cutting trends look promising on the surface but mask two disturbing trends: the lower costs were achieved by suspending operations at several higher-cost mines; and the distribution of costs is skewed by several large producers with low costs.

More than 2.5 million oz. of Nevada production were produced for US$100 per oz. or less. However, 10 of the 34 Nevada operations had total production costs greater than the 1999 average price of gold (US$278 per oz.) and therefore lost money.

In 1999, the impact of the previous three years’ low gold prices became evident in Nevada. After the Newmont Mining/Santa Fe Pacific Gold merger in 1998, AngloGold, the world’s largest gold producer, acquired the parent corporation of Independence Mining, operator of the Jerritt Canyon mine, near Elko Cty, while Placer Dome acquired Humboldt Cty. producer Getchell Gold. More recently, Franco-Nevada, operator of the Ken Snyder mine, merged with its sister corporation, Euro-Nevada, but later failed in its attempt to become the world’s fourth-largest gold producer when a proposed merger with South Africa’s Gold Fields was nixed by the South African Ministry of Finance. Meanwhile, Battle Mountain Gold was swallowed by Newmont Mining.

Mergers are a normal response to a low-price environment in any industry, as companies look to reduce overhead costs and utilize capital more efficiently.

— The preceding is reprinted from Nevada Miner, a publication of the Reno-based Nevada Mining Association. The author is an associate professor at the Natural Resource Industries Institute, part of the University of Nevada, also based in Reno.