Gold: Beyond Best Intentions

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Remember, people will judge you by your actions, not your intentions. You may have a heart of gold -- but so does a hard-boiled egg.

(Quote from Thinkexist.com)

For gold mining companies, things can often be a little unsettling with the swings in the commodity’s price and the challenges of operating in diverse jurisdictions. Best intentions are sometimes pushed to the wayside as the realities of the mining business intrude on the finest laid plans. What challenges are today’s leading gold mining companies facing?

Legal challenges

Barrick Gold (NYSE: ABXNYSE: ABX)) has their Pascua-Lama project situated on the Chile/Argentina border. This project, with an expected mine life of 25 years, has the potential to be a significant revenue producer for the Company. Pascua-Lama is one of the world's largest gold and silver resources. It has close to 18 million ounces of proven and probable gold reserves and 676 million ounces of silver contained within the gold reserves.

Barrick is facing an environmental challenge concerning Pascua Lama. According to a Mining.com report (July 19, 2013; Cecilia Jamasmie), “An indigenous group that has led the legal battle against Barrick Gold’s (TSX: ABX) $8.5 billion Pascua Lama project in Chile, is planning to request the country’s Supreme Court to review Monday’s lower court decision, as they claim it is insufficient to prevent further environment pollution.

On Monday, July 15, a Chilean court ruled that Barrick has to construct infrastructure to prevent contamination of the water supply for indigenous communities along a section of the aforementioned Chile/Argentina border. Investors should note the increased expenses companies incur and the mining time lost as they face legal challenges to their proposed operations. Barrick will build this infrastructure; however, this will delay the mine’s operation probably into late 2015.

Continuing rising costs

The challenge mining companies’ face is the costs inherent in producing the gold they wish to bring to market. The industry is very labor intensive and it can be multiple years before a company sees any return on their considerable investments in labor, land, exploration, permits, plant & machinery, various assessments and more.

Consider Newmont Mining (NYSE: NEM); last year (June 2012) they made staff cuts at their Colorado operations. The reason for this action at the time?

According to Mr. Gary Goldberg, President and CEO, he said then, “Ongoing price volatility and steadily rising costs create intense pressure for Newmont to continuously improve its efficiency and effectiveness.” 

In 2013, mining entities still face steadily rising costs. Yamana Gold, (AUY), for Q1 2013 had by-product cash costs of $383 per gold equivalent ounces (GEO) ($292 per GEO in Q1 of 2012). Co-product cash costs were $587 per GEO ($518 per GEO for Q1 of 2012).

For Q1 2013 Newmont Mining had gold and copper costs applicable to sales (CAS) of $758 per ounce and $2.19 per pound. This represents an increase of 22% and 11%, respectively, from the 2012 quarter.

Increased capital expenditures (capex), falling gold prices, government policies

A report this month in The Ghanaian Chronicle (http://thechronicle.com.gh/) indicated that the AngloGold Ashanti Ltd. (NYSE: AU) Obuasi mine “is facing very grave operational and financial challenges…” The company’s CEO pointed out that AngloGold Ashanti is pumping $30 million a month into this mine, which they cannot sustain. The Company’s 2012 capital expenditure at Obuasi was $185m. This represents an increase of 41% on the $132 million they spent in 2011.

It’s fine if significant increases in capex produce desired returns. However, investors should note AngloGoldAshanti’s major capex outlays, and the fact that the Company is facing those “grave” challenges.

Furthermore, AngloGold Ashantispecified that the falling prices of gold, increased production costs, and growing pressure from the banks are also contributing to this operational and financial turmoil at Obuasi.

What’s behind gold prices falling? Part of it is that as people believe the economy is improving, or will improve, they feel less of a need to hunker down with gold investments. Some seek safe havens in precious metals as they see turmoil in the world economy; if they sense some sort of recovery is happening the supposed safe havens don’t have that allure.

Of course, there’s always government policy that mining companies must face. Investors should note that government policy can put a crimp in mining company expansion plans and initiatives. Consider the Philippines; the nations’ Department of Trade and Industry said this month that new mining projects no longer qualify for income tax holidays.

As reported in GMA News Online (www.gmanetwork.com/news/), “In a March 26 position paper, the Department of Finance said income tax holidays for some sectors including mining should be removed.”

Mining for gold is not for the faint-hearted. The top companies in the industry understand this and investors should research how these companies address the challenges they face. Part of due diligence as an investor is researching the management teams of gold companies and the modified strategies they have in place when best intentions don’t always pan out.


Michael Ugulini has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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