Sustained cost reduction, higher gold production and strong hedging revenues resulted in a strong third quarter for
Net earnings for the three months ended Sept. 30 were US$33 million (or 12 cents per share) on sales revenue of US$336 million, compared with US$6 million (1 cents per share) on US$312 million in the corresponding period of 1997. For the first nine months of 1998, Placer earned US$74 million (26 cents per share, after distributions for preferred securities) on revenue of US$942 million, up from US$35 million (10 cents per share) on US$917 million a year ago.
Cash flow from operations for the nine months increased 72% over the year-ago period, to US$335 million ($1.30 per share). “This reflects the ongoing focus of our strategy on growth in cash flow per share, recognizing that it is that which drives shareholder return,” says Placer’s president, John Willson.
As of Sept. 30, the major had increased its cash position this year by 50%, to US$440 million.
The company’s share of gold production for the third quarter was 824,000 oz., bringing production for the nine months to 2.2 million oz., compared with 1.9 million oz. in the first nine months of 1997. Quarterly cash costs fell dramatically to just US$128 per oz. (including royalties), with total production costs coming in at US$202 per oz., versus US$203 and US$289 per oz., respectively, in the year-ago period.
While all of Placer’s mines recorded lower cash production costs than a year ago, the gains are largely due to a full nine months of low-cost production from the Pipeline deposit at the 60%-owned Cortez joint-venture in Nevada and a continually strong performance at its 60%-owned Granny Smith mine in Western Australia. Contributing factors include high productivity at virtually all its operations and a strong U.S. dollar.
The Pipeline contributed 458,017 oz. to Placer’s account at a cash cost of US$53 per oz. and a total cost of US$150 per oz. The mine is on track to produce 1 million oz. in each of 1998 and 1999 at a cash cost of about US$60 per oz.
“We expect to keep our cash costs at or below US$180 per oz. through the year 2002 inclusive,” says Willson. “Our current production forecast for 1998 has been increased to 2.8 million equity ounces. We expect to remain within about 10% of this level for the next four years.”
Placer continued to benefit from its gold-hedging program. The company realized an average gold price of US$340 per oz. on 9-month sales — US$55 per oz. above the average London market price of US$294 per oz. Hedging contributed revenue of US$117 million, compared with US$60 million a year ago.
While Placer has locked-in a third of the next three year’s production at prices in excess of US$480 per oz., Willson says the company still retains significant exposure to upside price movement. He adds that given the somewhat stronger market conditions during the past quarter, Placer has been modestly adding to its hedging position.
“All of these factors add up to a very positive trend of earnings for 1998,” says Willson. “Six cents in the first quarter, eight cents in the second and twelve cents in the third.”
Willson stresses that the third-quarter results “were no flash in the pan” and that cost reductions at the mines are sustainable.
The grades processed this year are higher than in 1997 at only four of the company’s gold mines. These include Cortez and Granny Smith (where, in both cases, much of this year’s production was not included in the 1997 year-end ore reserve), as well as Bald Mountain in northeastern Nevada and 68%-owned Musselwhite in Ontario.
Says Willson: “What we are saying about our cost reductions is this: We are not sterilizing what would otherwise be economic material for the sake of short-term gain. We are giving a greater degree of autonomy to our business unit managers, who are our mine managers, and they are currently, and in the future, being measured on financial returns, rather than the traditional kind of results. They are becoming much more financially oriented. That leads them to look at everything we’re doing and to consider whether or not it adds value. The mine manager is motivated to regard the mine as more his own business.”
He adds: “What you have seen from Placer Dome this year is the very positive result of a strategy consistently applied over time to continuously upgrade the quality of our asset portfolio. We are maintaining a stable, low-cost production base. And despite the gold price, we’re delivering stronger cash flow earnings and we have the financial resources to continue building a quality reserve base that will deliver superior shareholder return.”
Placer recently released details of an updated feasibility study for the 70%-owned Las Cristinas project in Venezuela. The project has grown in terms of total and annual gold production, while the operating cost has decreased. Total average production is now expected to be 530,000 oz. per year during the first decade of a 20-year mine life. “Las Cristinas is a fundamentally strong project,” says Willson. “Higher throughput, together with other operating improvements and design revisions, has reduced our unit costs in the first 10 years to US$155 per oz. cash and US$240 per oz. total.”
The cash costs are based on what Placer believes is a realistic operating cost estimate of US$5 per tonne milled, after copper credits of US80 cents per lb. (a copper price of US95 cents per lb. is assumed). By comparison, the 1996 feasibility study indicated an operating cost of US$6.42 per tonne milled.
The reduction in costs is attributed to a simplified flow sheet that involves the use of cyanide destruction. Also, the pit design has also been optimized; Placer expects to realize further savings in consumables, such as cyanide; and an extra ball mill is to be added in year four, which will increase daily throughput to 48,000 tonnes, bringing down unit costs as well.
Willson says Las Cristinas will contribute an annual 370,000 equity ounces to Placer’s account at a cost sufficiently low to generate a return on Placer’s investment even at a gold price of US$300 per oz.
Las Cristinas is estimated to contain proven and probable reserves of 323 million tonnes grading 1.1 grams gold per tonne, equivalent to 11.7 million contained ounces. Recovery rates average 80% for gold.
“We believe this mine is going to be with us for a long time,” predicts Willson. The capital cost remains unchanged at US$575 million, of which US$495 million remains to be funded. Placer expects to complete the financing by year-end so that construction can begin in the first quarter of 1999.
In northern Chile, Placer is preparing a measured and indicated resource estimate for the Cerro Casale gold-copper porphyry deposit, part of the Aldebaran property. “We expect [the new estimate] will somewhat enhance the resource that was represented by our partners: 650 million tonnes grading 0.8 gram gold and 0.28% copper, at a 0.5-gram cutoff,” says Willson. Exploration of satellite targets has added some resources, though this work has not yet idenfified near-surface, higher-grade material for a starter pit. Feasibility work is continuing.
Placer can earn a 51% interest in Aldebaran from partners
At the Granny Smith open-pit mine in Australia, where surprisingly higher ore grades continue to be mined, Placer’s partner, Delta Gold, has disclosed an inferred resource for the higher-grade Wallaby discovery of about 9.3 million tonnes grading 4.4 grams, containing 1.3 million oz. Placer is encouraged by the exploration results to date and Willson says this is probably a reasonable estimate, but he caution
s that it is too early to complete an updated resource. Drilling continues to define the extent of the Wallaby mineralization.
At the end of 1997, Granny Smith hosted a proven and probable reserve of 11.1 million tonnes grading 2.2 grams, equal to 793,000 contained ounces.
Placer plans to begin a prefeasibility study on the Donlin Creek gold project in Alaska in early 1999. The measured, indicated and inferred resource is expected to rise above the 7 million contained ounces last. Currently, crews are drill-testing a shallow target, the grade of which is potentially higher than the 3.4-gram average.
At the Courageous Lake gold project in the Northwest Territories, the company is updating the resource estimate of 3 million oz. contained in 30 million tonnes grading 3.5 grams. The estimate will serve as the basis for a rough economic valuation, to be undertaken early next year.
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