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 Newmont Mining is a prime example of how companies are responding to
bleak industry conditions by building mines on a smaller scale than
in the past, with the price of gold down almost 40 percent from its
peak in 2011 and banks avoiding the sector.
The cautious approach will likely persist even if conditions
improve, with miners increasingly teaming up on big, complex
projects to share costs, expertise and risk, senior mining
executives and industry watchers said.
"If there's going to be something go wrong, you'd rather it go wrong
after you've spent $1 billion than $3 billion or $4 billion," said
Goldcorp Inc <G.TO> Chief Executive Chuck Jeannes. Goldcorp, the
world's most valuable gold miner by market capitalization, owns
stakes in a number of joint-ventured assets such as the Alumbrera
gold mine in Argentina and the Pueblo Viejo gold mine in the
Dominican Republic.
The price of gold has fallen as concerns about inflation receded and
the U.S. dollar rose against most major currencies. Gold is often
used as a hedge against inflation, as prices typically rise when the
dollar weakens.
Barrick Gold <ABX.TO>, the world's largest bullion producer, could
be the poster child for problem-plagued mega-mines.
Its Pascua Lama project in the Andes was mothballed in 2013, bogged
down by environmental issues, labor unrest, political opposition and
development costs that ballooned to $8.5 billion.
"A phased approach to developing large, complex capital projects
makes a lot of sense," said Barrick spokesman Andy Lloyd. “There is
potential to mitigate development risks, reduce upfront capital
requirements and expedite initial cash flows from the project, which
could be used to fund future expansions."
Barrick has no new mine plans currently, as it sells assets to trim
a $13 billion debt.
Last week, it announced a strategic tie-up with Zijin Mining
<601899.SS>, selling a stake in its Papua New Guinea mine as a first
collaborative step with the Chinese miner.
Newmont Mining, the world's No. 2 gold producer, decided to start
small with its recently-announced Long Canyon project in Nevada.
The first phase is a $250 million to $350 million development funded
with cash flows and available cash, using existing staff. Payback is
projected in just over four years.
Rather than building all the infrastructure for future phases up
front, this approach makes each successive phase carry and provide
its own return-on-investment, said Newmont CEO Gary Goldberg.
"From an investor standpoint, it's a good thing because it minimizes
the risk involved," he said.
SWEET SPOT
Yamana Gold is building Cerro Moro in Argentina for $265 million
over two and a half years. It will be Yamana's smallest operation on
a throughput basis, or the volume of ore processed each day.
[to top of second column] |
"It's a sweet spot in terms of manageable capital expenditures over
an extended period of time," said CEO Peter Marrone.
Last year, the average annual projected gold output from projects
that just went into construction and entered production was 15
percent lower than five years earlier, according to SNL Financial
data.
Last year there were also more small mining debt and equity issues,
correlating to the size of mines being built.
The average issue in 2014 was $128.1 million, Thomson Reuters data
shows, while the average for the preceding seven years only fell
below $160 million one other time.
The "easy stuff" has already been discovered, said Sterne Agee
analyst Michael Dudas, so some of the most interesting prospects are
in areas with different rules and regulations.
"That makes it a lot more difficult to get the confidence level from
the board and investors to take big swings," he said. "I do think
the industry will be a lot more collaborative as we move forward,
because investors want risk-adjusted returns that require some
thought and some rigor."
To be sure, not all mines can be built in phases and bigger projects
will find fresh appeal when gold rebounds from the current $1,175 an
ounce.
"The market is short-term focused," said Jeannes at Goldcorp. "If
the gold price were $1,800 an ounce and the equity markets were wide
open . . . our investors would be questioning us if we weren't going
for the full, large, build-out."
But miners have learned from the past five years, said Joseph
Foster, portfolio manager at Van Eck, Barrick's biggest shareholder.
"I don't think we'll see the capital cost blowouts and the margin
squeezes going forward that we have in the past," Foster said.
"They've learned a very hard lesson and I don't think they'll forget
it."
(With additional reporting by Euan Rocha in Toronto; Editing by
Jeffrey Hodgson and John Pickering)
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