Mega gold mine era coming to a close - for now

Three different press releases from three different companies over the last seven days demonstrate clearly an interesting trend.

Author: Geoff Candy
Posted: Friday , 14 Jun 2013 

GRONINGEN (MINEWEB) -

Over the course of the last seven days three gold companies have put out rather different pieces of news that, when held up together point decidedly toward the view that the era of the big gold mine is over.

Starting last Friday, Newcrest, Australia’s largest gold digger announced that it expects to write down as much as $6bn from the carrying value of its gold assets because of the plummeting gold price.

In a press release on Friday it said, “In response to the change in market conditions, Newcrest has taken and will continue to progress a range of actions to maximise free cashflow over the next three years."

The actions announced included, among other things, cutting discretionary spending on projects, reducing exploration activities significantly cost cutting programmes across all of its operations and increasing its stockpile utilisation.

Then, on Monday of this week, Kinross announced it has called it a day on its Fruta del Norte project in Ecuador after two years of negotiations with the government failed to yield an agreeable arrangement.

According to Kinross the government of Ecuador also indicated it will not support efforts to solicit a potential new partner or a buyer, which means the group expects to take a charge of $720m in the second quarter.

In her excellent piece on the subject, my colleague, Dorothy Kosich, writes,  “The write-down will be the second major charge Kinross has taken as a result of former CEO [Tye] Burt’s policies. In 2012, Kinross took a $3 billion non-cash impairment charge on the Tasiast property for which it had paid $7.1 billion in shares.

Indeed, in a rather prophetic piece from Reuters published on Mineweb, the wire service writes that  a number of analysts considered the write downs at Newcrest to be only the thin end of the wedge.

"We certainly expect we will see further writedowns from other producers as we ... get closer to reporting season. It could be a trend," Reuters quoted David Lennox, an analyst at Fat Prophets, as saying.

On their own, these two announcements paint a picture of a sector worried a great deal more about costs than about growth - a trend that has developed over the course of the last 18 months and has coincided with increasingly loud calls by investors for better dividends and a wave of CEO firings for poor performance and, particularly, cost overruns.

But, it is the third announcement, by Exeter Resource that perhaps most thoroughly brings home how the sector itself is thinking about growth.

The junior announced on Tuesday that the Chilean government had granted its application for surface rights over its massive Caspiche development.

These rights, Exeter says, “include an area large enough to cover all the development options under consideration for a mine at Caspiche.”

Now, in and of itself, the announcement is fairly inconsequential; what is important is the wording. Exeter’s management team has, it would seem, resigned itself to the fact that, in the current market it is unlikely to find a buyer for a massive gold/copper porphyry deposit which is initially how Caspiche hadbeen presented - and with good reason.

Sandwiched between Barrick’s Cerro Casale project (now on hold) and Kinross’s Maricunga mine, the deposit is massive, boasting proven and probable ore reserves of 1.091 billion tonnes containing 19.3 million ounces gold, 4.62 billion pounds copper, 41.5 million ounces silver. Indeed, its make up is rather similar to Cerro Casale.

To this end, the group has been looking at other ways the project could be mined in an effort to make it a more ‘bite-size’ prospect, that would be more appealing. This is where the new surface rights become important as they significantly derisk the project by allowing a potential buyer to initially mine only the gold-only oxide cap.

A couple of years ago it is likely that Exeter and its Caspiche project would have been snapped up pretty quickly, in the same way as the projects surrounding it were but, now, there is just no real appetite on the part of the majors to develop such a project. Indeed, as Cerro Casale demonstrates, many of these projects are being put on hold.

Which is why Exeter's announcement earlier this week is so important. Recognising this fact the team is giving the project a makeover in an effort make it more attractive to potential buyers and to ensure that no obstacles remain on the route to development

And, it would seem, such a move is definitely one in the right direction as this is a trend that is likely to remain for some time.

Speaking to Mineweb earlier in the Week Ernst & Young's global Metals and Mining Leader, Mike Elliott, speaking on the launch of the group's Business risks to mining and metals survey said, "What the market was demanding a year and a half ago was very much maximising production and taking advantage of the higher price environment and so what were seen as sound investments a year and a half ago are no longer seen that way.

"But," he says, "the implication of this is that it is happening right across the board its happening from the largest companies down to the smallest companies and because of that there is, across the sector, somewhat of a capital strike."

This capital strike Elliott says, is often, in the case of the majors, being imposed voluntarily; they have access to capital but are essentially denied the permission to go out and invest that capital by investors who are demanding greater returns.

Where as at the smaller end of the market, Elliott says, they can't even get access to capital at this point in time. so, without that capital or the permission to use that capital, no new investment is occurring.

This lack of development will inevitably sow the seeds for the next shortfall but, until then, mega projects, especially in the gold space seem destined for the back burner.