Strong cash flows allow project pipeline and exploration investments

By Steve Fiscor, Editor-in-Chief

Gold mining was probably the only business that didn’t suffer during the last two years. Gold miners prospered as investors sought gold as a means of wealth protection during the global economic meltdown. Even today, as business leaders try to gauge the eventual economic recovery, gold investors are feeling confident amid a rising level of sovereign debt and questionable currencies. The market has seen less selling from the central banks and more investment demand.

In fact, investment demand drove gold prices to new highs in 2010. Several factors were attributable and most were related to the world economy. Throughout the year, investors first saw a Greek bailout destabilize the euro, then other European economies began to crumble under the load of sovereign debt. Loose fiscal policies in the United States, such as quantitative easing, low interest rates and the extension of tax credits further weakened the U.S. dollar. Until Americans manage to tackle the soaring national deficit, gold miners have little to worry about.

Beyond the financial security, many people simply want gold in their portfolio. They want to be part of the rising tide. And, why not? Gold remains scarce. Considering market capitalization and the Exchange Traded Funds (ETFs), one gold executive estimated that the entire business amounts to only about $600 to $700 billion.

The World Gold Council introduced the gold ETF in 2004 and the price of gold has increased 200% or more since. If investors decided to reallocate those investments, the consequences would be enormous and the market could turn quickly for gold miners.

Gold mining executives seem to repeat the same set of talking points. Almost all say mine supplies are contracting, maybe because it has done so for so many years. The costs for finding, permitting and bringing a mine into operation continue to increase along with year-on-year cash costs for mining, which is certainly believable. They almost all point to a healthy project pipeline and talk about the production increases they have slated through 2015.

The reality, however, is that mine production rose by 3% last year, as several new projects became a reality, including two large mines: Boddington and Cortez Hills. Further gains are expected for the first half of 2011. While increasing levels of mine production could impact gold prices, many gold analysts believe that gold will top $1,500/oz by mid-2011 if not sooner, and possibly reach $1,600/oz by the first quarter of 2012.

Barrick Brings Another World Class Mine Online
Barrick Gold remains the largest gold producer. During the first half of 2010, Barrick’s gold production increased 11% to 4.01 million oz. The company’s cash costs decreased 4% to $446/oz. With a realized gold price of $1,158/oz; the company’s margins were up 56% (or $812 per oz produced).

Barrick’s President and CEO Aaron Regent recently explained what his team was doing to enhance the value of its assets. “We are investing in higher return projects, maximizing value of existing assets, increasing our reserves through exploration and selective acquisitions, and leveraging our core competencies, such as technical expertise, permitting skills and infrastructure throughout the world to commercialize new deposits,” Regent said.

Barrick has about 140 million oz of reserves. Since 1990, the company has mined more than 100 million oz, acquired 103 million oz and through exploration added 135 million oz at a cost of about $15/oz.

In North America, Barrick has nine gold mines in production and two projects, one under construction and another in feasibility. The region represents about 40% of the company’s production and 40% of its reserves. The newest addition is the Cortez Hills mine in Nevada. The mine was completed during 2010 and Barrick is currently ramping up production. “We expect to produce 1.1 million oz at a cash cost of $315/oz from Cortez Hills,” Regent said. “We recently completed a supplementary EIS and Record of Decision expected during the first quarter of 2011. In 2006, Barrick had 6.3 million oz of reserves at Cortez, of which, we owned 60%. In 2010, the reserve position has grown to 14.1 million oz and we own 100%. Cortez will be a world class mine. It has another 4 million oz in resources and the underground deposit is open at depth.”

The Pueblo Viejo mine, located in the Dominican Republic is under construction (1 million oz, 60%) and expected to start producing toward the end of 2011. With low recoveries, the economics at Pueblo Viejo were challenging, Regent explained. “After Barrick purchased the property, our technical group improved the flowsheet and increased the recoveries of silver and copper, which improved the economics by lowering the unit costs and expanding the resource from 13.4 million oz to 23.7 million oz,” Regent said.

In Peru, Barrick has the Lagunas Norte mine, a grass roots discovery that today is the company’s lowest cost producer. The mine is producing more than 1 million oz/yr with a reserve of 7.5 million oz. The company is looking at an area referred to as the Lagunas Norte Sulphides to possibly extend the mine life by four years with about 2 million oz.

In the Asia Pacific region, Barrick operates six mines in Australia and Porgera in Papua New Guinea (PNG). Barrick increased its ownership in Porgera from 75% to 95% in 2007. The company is now focused on underground mine extensions and believes significant exploration potential exists.

The company’s Kalgoorlie mine (or Super Pit) is one of the largest mines in Australia and has produced more than 13 million oz. The Golden Pike layback is now in progress, which will extend the Super Pit’s life to 2022. The company is also considering additional opportunities with the Fimiston underground potential.

“We see meaningful growth, capturing significant upside within our current asset base,” Regent said. “We have set a target to reach 9 million oz/yr of gold in the next five years.”

Newmont Brings Boddington Online
Despite ongoing pressures and some production issues, Newmont plans to meet production guidance and aggressively advance its project pipeline. Ongoing cost pressures, higher ramp-up costs for the Boddington mine, and an adverse foreign exchange situation with the American and Australian dollars nag at Richard O’Brien, president and CEO of Newmont. He remains optimistic that his team will work out the kinks at Boddington and focuses on the project pipeline, particularly Akeym (Ghana), Conga (Peru) and Hope Bay (Canada). “Our project pipeline is a level of sustenance for the company,” O’Brien said. “With current gold prices, we can fund these three projects and have the cash flow for other new projects and exploration.”

In North America, Newmont continues to see solid performance. “We had a geotech event at Gold Quarry, but it has been remediated,” O’Brien said. During the third quarter, Newmont’s Nevada gold production decreased 7% from the same period last year due to lower leach tons placed at Twin Creeks and Carlin, lower Gold Quarry ore feed to Mill 5 due to the slope failure which occurred in late 2009 and the completion of underground mining at Deep Post in 2009.

In South America, for the next several years, Newmont expects Yanacocha to produce at the same levels, but it will eventually decline. The Conga project represents the future for Yanacocha. During the third quarter, gold production at Yanacocha decreased 35% from the same period last year to mine sequencing resulting in lower leach tons placed, transitional ore stockpiling at La Quinua and lower mill grade and recovery.

In Africa, Ahafo has been a steady performer for Newmont, with consistent gold deliveries and there are new opportunities there as well. “Once we get Akyem moving into execution, Africa will be our largest growth area from 500,000 oz to 1 million oz,” O’Brien said.

In Asia-Pacific, the company is still seeing lower than expected grades at Boddington. Unplanned mill maintenance resulted in lower throughput and production for July and August, while higher mill grades resulted in higher gold and copper production in September. “We are still trying to determine the challenges at Boddington,” O’Brien said. “We have moved some of our best people to this operation and they will continue to ramp up this 20-year asset.”

On an incremental basis, at $1,100/oz gold, Newmont generates about $1.1 billion in cash flow. “For every $100/oz increase in realized price, we add $300 million in cash flow,” O’Brien said. “At $1,300/oz, the company would have $1.7 billion. We are delivering true gold price leverage.” In the next few years, O’Brien sees the company transitioning from big fixes to growth.

AngloGold Ashanti Sees Improvement
During the third quarter, AngloGold Ashanti reported a quarterly production increase of 3% to 1.16 million oz from the previous quarter. Total cash costs rose 4% to $643/oz, due to seasonal factors and stronger operating currencies, according to the company. The improved performance was attributable to a strong recovery in volumes mined in South Africa and Australia, as well as a steady performance from Continental Africa and the Americas.

The company’s South African operations produced 478,000 oz at a total cash cost of $594/oz in the third quarter of 2010, compared with 447,000 oz at a total cash cost of $560/oz the previous quarter. The strong result, according to the company, was driven by impressive performances at the core operations and is noteworthy given the power tariffs, annual labor increases and higher royalty payments. At the company’s West Wits operations, higher yield helped the cornerstone Mponeng mine increase output by 1% to 138,000 oz, while total cash costs rose 16% to $475/oz.

Gold Fields Delivered in 2010
Targeting 5 million oz by 2015, Gold Fields has seen its attributable production increase 2% to 3.5 million oz. The company reports more stable production from the Driefontein, Kloof and Beatrix mines. Production has increased 52% at South Deep to 265,000 oz, 80% at Cerro Corona to 394,000 oz, and 20% at Tarkwa to 721,000 oz.

Gold Fields hopes to grow South Deep to 750,000 oz or 800,000 oz by end of 2014. A raft of projects are under way to help the mine reach that level, including: a refrigeration plant and tailing storage facility, which will be completed in 2011; twin ventilation shafts, which will be completed by the end of 2012 along with a plant expansion to 450,000 mt/month. Meanwhile new mine development continues to 2014. Gold Fields has also increased its exploration spending to $150 million per year.

Goldcorp: A Year of Development Success
After paying $765 million for Andean Resources, Goldcorp ended the year with more than $530 million in cash. “2010 was a year of mine development success as we completed construction of the Peñasquito mine in Mexico,” said Chuck Jeannes, president and CEO, Goldcorp. Commercial production at Peñasquito started on time with a smooth ramp-up.

Red Lake ended the year at more 700,000 oz of gold production at very low cash costs, Jeannes explained. “Marlin and Los Filos hit their strides during the year, while major exploration success at all three Canadian mines has created the opportunity for enhanced production,” Jeannes said.

“The year-end completion of the transaction to acquire the Cerro Negro project in Argentina has brought us another future cornerstone mine: a low-capital cost project that is expected to contribute significant gold production starting mid-2013 at extremely low cash costs. The El Morro copper-gold project in Chile marked our return to one of the strongest mining jurisdictions in the world while the Camino Rojo acquisition secured a key strategic asset in the highly prospective Peñasquito district.

“With gold production set to double at Peñasquito this year, our focus shifts to building our next suite of growth projects. Construction of Éléonore in Quebec will accelerate; the drift connecting the Cochenour deposit to Red Lake will exceed the halfway point by the end of 2011; and the receipt of permits and the first quarter completion of a feasibility study update at Cerro Negro will spur the development of a much larger mine than planned by the previous owner.

Goldcorp also provided production and cash cost guidance for 2011. The company expects to produce between 2.65 and 2.75 million oz of gold, which includes a significant contribution from Peñasquito as it ramps up to full production.

At Red Lake, the “fill the mills” initiative to use excess milling capacity will result in a greater proportion of mined material from lower grade zones in addition to ore mined from the High Grade Zone (HGZ). Overall, the mine plan is expected to result in a slight decline in overall gold production to 665,000 oz of gold at very low cash costs. The completion of the connection drift at the 45 level between the Campbell and Red Lake complexes has provided additional flexibility for HGZ development.

The construction of the 5-km high speed haulage drift to connect the Cochenour shaft with the Red Lake mine on the 5,400 ft level has advanced to a completion level of more than 20%. Upon completion, the drift will enable ore from the Cochenour/Bruce Channel deposit to be hauled directly to the Red Lake mine for processing at the existing mill facilities, thus adding an important source of high grade, low-cost production commencing near the end of 2014. The company has set its sights on 4 million oz by 2015.

Newcrest Mining Acquires Lihir
During May, Newcrest Mining agreed to buy Lihir Gold to create the fifth largest gold company. The company’s Cadia Valley and Telfer operations are also leading gold producers.

During the last quarter the company reported a 7% increase in gold production at Cadia Valley in New South Wales, reflecting higher gold grades from the open-pit. Heavy rainfall events during December impeded access to the high grade zone at the base of the open-pit. The production ramp up from the Ridgeway block cave continued achieving an annualized rate of 4.5 million mt/yr. Site costs were slightly higher associated with increased production from the block cave and higher waste movements in the open-pit.

Lihir’s December quarter performance was 221,234 oz of gold. Gold production increased 6% over the previous quarter due to increased mill throughput. Total material moved from the open-pit increased during the quarter reflecting improved shovel productivity and the commencement of the Kapit pit development.

The $700 million Lihir Million Ounce Plant Upgrade (MOPU) continues on schedule with increasing intensity of structural and mechanical erection work. All major procurement packages are well advanced with the focus shifting to outstanding construction packages and non-critical supply items. The project should be completed by the end of 2011.

In his fourth quarter presentation, Ian Smith, managing director and CEO, Newcrest Mining, announced the company’s quarterly gold production increased 7% to 722,783 oz with full year gold production in the range of 2.85 to 2.95 million oz. He cited an 18,000 oz impact on Cadia Valley’s open-pit production from record rainfall; 5% increase in Telfer’s production due to higher mill throughput; a 6% increase in production due to higher mill throughput at Lihir and Gosowong; and a 23% increase in gold and 44% increase in silver due to increased recoveries at Hidden Valley.

Newcrest plans to invest A$101 million in exploration, primarily in the Asia-Pacific region with most of the money targeted toward Australia, PNG and Indonesia. Smith expects the company’s total production to grow to 3.75 million oz by 2014.

Kinross Buys Red Back
Kinross Gold completed the acquisition of Red Back Mining. “Kinross will be a growth leader among senior gold producers,” said Tye Burt, president and CEO, Kinross. “We expect production to grow from the current combined forecast of 2.6-2.7 million gold equivalent oz in 2010 to 4.5-4.9 million gold equivalent oz in 2015, based on the new production expected from Kinross’ existing suite of growth projects, combined with the significantlyexpanded production expected from the Tasiast mine.”

As a result of the Red Back acquisition, Kinross has increased its 2010 exploration forecast from $102 million to $130 million. Chirano consists of several open-pit mines and an undergound mine in Ghana. Tasiast is an open-pit in northwest Mauritania.

Grasberg to Mine Lower Grades in 2011 At Freeport-McMoRan Copper & Gold’s Grasberg mine, the sequencing of mining areas with varying ore grades causes fluctuations in the timing of ore production. Freeport expects to be mining in a lower-grade section of the Grasberg pit during 2011.

As a result, Indonesia sales of 1 billion lb of copper and 1.3 million oz of gold for the year 2011 are expected to be lower than the 2010 sales of 1.2 billion lb of copper and 1.8 million oz of gold.

Ore grades and copper and gold sales for 2011 are expected to be higher in the second half compared to the first half with approximately 53% of copper and 57% of gold expected in the second half.

The author would like to thank the Denver Gold Group. Information for this article was gathered primarily from the group’s Denver Gold Forum, held during September 2010, and updated with individual earnings reports.