Mergers dominate lacklustre year in US mining

Denver — The year 2000 began on a note of optimism for mining in the U.S. The Washington Agreement, an accord of Europe’s top bullion-holders that aims to regulate and limit sales, promised to revive the industry after a period of low gold prices (at one stage, dipping below US$260 per oz.).

However, hopes were dashed in April, when the bottom fell out of the dot-com market on the Nasdaq. Industry experts and investors stood by, praying that this might somehow augur well for mining, but little materialized.

The “new economy” crash, which worsened over the summer months and during the subsequent period of uncertainty surrounding the U.S. presidential election, had little immediate effect on mining. The Nasdaq hit its peak in March at 5,048 points, only to plunge more than 50% to less than 2,400. The Dow Jones industrial average was spared the disastrous falls that hit the Nasdaq, though it is now about 10% below its all-time high, set early in the year.

The election resolution put a charge into the overall market (if only briefly), while, at the same time, making it clear that investors who had left in the wake of the Bre-X scandal and falling gold prices were not exactly beating a path back to the mining sector. Despite tremendous losses incurred in the long downturn, they have not yet abandoned the high-tech sector.

Meanwhile, the industry has sought to remedy its problems through consolidation, a development that would seem to offer several advantages. Mining companies need to grow larger to compete with the large computer companies that form almost overnight on the Nasdaq. Also, mergers enable larger companies to cut costs through economies of scale, and thereby combat low metals prices.

Consolidation gripped the gold sector in particular, though several of these proposed mergers failed to pan out. Franco-Nevada Mining (fn-t) and Gold Fields (gold-q) will be remembered as the merger that wasn’t. The South African government nixed that mix, claiming it would hurt the country’s tax base. On the other hand, Denver-based Newmont Mining (nem-n) and Battle Mountain Gold (bmg-n) are on-track to join forces, and Barrick Gold (abx-n) succeeded in acquiring Pangea Goldfields, thereby solidifying its holdings in Tanzania.

Production forecasts continued to climb as a result of mergers and acquisitions, even though market capitalizations did not. Newmont expects to produce more than 4.5 million oz. of the yellow metal this year, ranking second in the world behind South Africa’s AngloGold (au-n), which stands to crank out in excess of 7 million oz. Barrick expects to contribute more than 3 million oz., with Placer Dome (pdg-n) not far behind.

Homestake to close

The downside to all this is that oversupply contributes to sluggish gold prices. Nevada’s annual contribution only just started to tail off after years of growth, reaching 8.6 million oz. But while production remained high, fewer gold mines opened during the year, and none of these were in the U.S. America had more than its share of closures, however, most notably Homestake Mining‘s (hm-n) flagship operation, near Lead, S.D. When the Homestake mine finally shuts its doors, at the end of 2001, it will have completed 125 years of continuous operation, and pumped out nearly 40 million oz.

The Dee mine, operated by Glamis Gold (glg-n) on Nevada’s Carlin trend, called it quits, along with the company’s Daisy mine in southern Nevada, and the Beartrack mine in Idaho, operated by Meridian Gold (mdg-n). Meridian more than made up for the loss of production by commissioning the El Penon gold-silver operation in northern Chile. It will have produced more than 280,000 oz. this past year at costs below US$60 per oz.

The copper sector showed promise early in the year, when consolidation — epitomized by Phelps Dodge‘s (pd-n) takeover of Cyprus Amax Minerals, and Grupo Mexico‘s assuming control of Asarco and Southern Peru Copper (pcu-n) — seemed to indicate a return to stronger prices. The vast holdings in warehouses around the world began to shrink as anticipated, and the red metal slowly climbed out of the cellar, giving the mining industry hope that at least one of its sectors was capable of prospering. However, the surge in prices stalled at a bit over US90 per lb., only to fall back and end the year at around US85, leav- ing market-watchers disappointed. Meanwhile, the marketplace is addressing new fears over a slowing U.S. economy, which could further hinder demand for copper.

Still, several projects, including Antamina in Peru and expansions at Escondida and El Teniente in Chile, are banking on higher prices.

Imperial struggles

A perpetual cloud over the American mining industry is the regulatory framework, which has been been a threat to the gold sector especially. Glamis wrangled with the Department of the Interior over the Imperial project in southeastern California. At stake, it has been argued, are the cultural heritage and scenic vistas of native tribes.

In 1997, three years after it began permitting the project, Glamis was gratified to receive the draft environmental impact statement (EIS) from the Bureau of Land Management (BLM). But the winds shifted in January 2000, when the Interior’s top solicitor, John Leshy, issued a directive that applied harsher permit standards.

In April, Glamis filed suit in U.S. District Court challenging the solicitor’s opinion — a suit that was later dismissed on the grounds that it should be filed only after the BLM issues a final ruling. As expected, the BLM turned down the final EIS and is expected to issue its final record of decision in December, at which point Glamis expects to resume legal action.

Problems also plagued the Crown Jewel gold project in northeastern Washington. In late 1999, part-owner Battle Mountain Gold received congressional assistance in pushing through its plan of operations. Early in the year, though, the state’s pollution control board raised water-related issues, prompting the company to downgrade the mineralization into the resource category. After nearly 10 years of permitting, Crown Jewel still has an uncertain future. Meanwhile, Newmont Mining, as a result of its impending takeover of Battle Mountain, will assume the latter’s right to earn 54% of the project. The remainder is held by Denver-based Crown Resources (crrs-o).

‘Takings’ suit

In April, Canyon Resources (cau-x) finally filed its “takings” lawsuit against the state of Montana, following the passing of an anti-cyanide measure in November 1998. The junior thought it had good company, with Franco- Nevada contributing US$3.5 million in financial aid. However, the Toronto-based royalty company decided not to involve itself in what could become a long legal fight. It walked in June, leaving Canyon to face the courts alone with a million dollars less in the coffers.

Low commodity prices and a worsening regulatory environment have been a double-whammy on exploration, the only bright spot being platinum group metals (PGMs).

Activity in the Duluth gabbro of northern Minnesota has stepped up, though not quite at the rate experienced across the border in Ontario. The most advanced project is NorthMet, which is being worked by PolyMet Mining (pom-v) for its copper-nickel-cobalt-gold-PGM potential. The junior had secured the help of North, though that participation ended when Rio Tinto (rtp-n) acquired the Australian-based company. PolyMet intends to have a prefeasibilty completed by 2001.

Also in pursuit of PGMs is Idaho-based Trend Mining (trdm-o), which is exploring in Nevada and Wyoming, and Idaho Consolidated Metals (ido-v), which is busy evaluating the Picket Pin structure in Montana. The latter runs parallel to the J-M Reef, being mined by Stillwater Mining (swc-x). Stillwater completed two tunnels into the J-M Reef at the East Boulder project, and initial production from that operation is scheduled for 2001.