For the last three years, Nevada’s gold mine managers have pegged the future of their properties and their industry on a return of gold prices to a comfortable and sustained $300-plus. While they waited optimistically (you can’t be a miner if you’re not an optimist), some learned that the needed increase, if it was coming, would arrive too late. They sent their employees home and closed up shop. Others with a better grade of ore rewrote their plan of operation, decreased their reserves and estimated mine life to concentrate on mining only the higher grade ore on their properties. Larger companies found new synergies in absorbing smaller or less able mines and mining companies. Most companies survived low prices by reducing manpower, and postponing major equipment purchases.
We’d have to regard the last few years as disastrous for the industry, except that, in spite of the closures, the layoffs, the mergers and a too-low recompense, Nevada gold mines reacted to the adverse metal price by producing more gold than ever before – in excess of 8 million ounces in both 2000 and 2001. Moreover, the major players that helped accomplish this feat have benefited greatly from consolidations within the industry and emerged stronger and more capable of taking advantage of the market turnaround that may have come at last.
At this writing in late May, gold prices have risen and stayed above that elusive $300 for some months. The industry, tempered by truly bad times, seems poised to once again make some real money.
The kind of activity that bloomed in the boom of the 1980s and early ’90s is probably relegated to the history books. But today’s outlook, as Nevada Mining Association President Russ Fields said at the end of May when gold reached $320, “sure beats the heck out of where we were eight months ago.”
In 2001, gold averaged $273. Fields said those mines able remain viable at that rate will respond to the significantly higher price by first becoming more profitable. Ore reserves that were discounted because grade or production cost made them marginal or worse will be reinstated, increasing mine lives once again.
What Fields calls “really good news for the industry” will prove good news for Nevada as well. The Net Proceeds of Mines Tax collected by mining counties is directly tied to the prevailing price of what is mined. Dr. John Dobro, professor of economics and director of the Natural Resource Industry Institute at UNR, made the effect of higher prices very clear. Mines that were able to produce gold when the price was $260 enjoy a $60 boost to gross margin when gold trades at $320. “Eight million ounces times $60 means an additional $480 million pumped into the economy.” It’s a boost, he said, that “could put some operations into the taxpaying mode.”
The three-year trial by fire has proven the strength and resourcefulness of the state’s mining industry. “We have a mature industry now,” said Fields, “We’ve gone through the boom periods of the ’80s and early ’90s – we’ve reached a steady state. It’s a steady state at a high level.”
Will The Mines “Ramp Up?”
Fields said during the troubled last years, “the mines have done what they had to do.” The eight million-plus ounces were produced by harder work from smaller labor forces. New equipment purchases were deferred, and mine plans were amended to go after only the least marginal material. Newmont Mining Corp., for instance, reported reducing its exploration and research expense by 28 percent in 2001 as a result of the depressed gold market.
At the same time, Newmont proved to be the master of consolidation. By acquiring Battle Mountain Gold, Franco-Nevada Mining Corp. and, finally, Normandy Mining, Newmont has become the largest gold mining company in the world. World-wide, the new Newmont matched all of Nevada’s eight million ounces in 2001.
Any positive changes in Nevada’s mining will have to be fueled by a sustained higher price. If the price remains high, established companies will once again invest in equipment, increase their reserves and re-extend mine lives.
The mines agree with Dobro’s assessment “It’s best to be cautious.” Gold prices will have to remain strong for quite some time before exploration is re-invigorated, but that will have to happen if the Nevada industry is going to find replacements for those millions of ounces extracted since 1998.
While the state of Nevada should see increases in its tax take, the potential for an increase in mine-related employment is probably small. After all, the surviving mines were able to take up the slack caused by mine closures and produce record amounts of gold with reduced staffs. One of the lessons of the bad times is that much of the previous labor force was unnecessary.
Fields said, in the short run at least, “We’re not predicting an increase in employment.” In fact the trend toward underground mining probably means even less employment in the industry. If new mines open, or some that are presently in mothballs reopen, then mining employment will rebound.
Will There Be New Mines?
Given the state of affairs in Nevada, experts agree that finding and proving new properties will not be the role of the major mining companies. Instead, they look to the “Juniors” or some say “Canadian Juniors” for any additional field exploration.
Fields said his feelings on the matter are mostly anecdotal. He hears from consulting geologists for instance that ” the phones are beginning to ring a bit more.”
Mike Mapa, technical services manager for Whitney & Whitney Inc., a Reno-based management consulting firm that provides business, technical and management services to the minerals resource industry, said many companies are no longer exploring in the U.S. He blames this on the high cost of holding claims, the rigorous process and cost of permitting a project, and remediation, which, he said, along with low gold prices have rendered many projects uneconomic.
But Mapa sees potential for new mines. “The climb in gold prices,” he said, “has made it easier to raise money. Many junior companies have been actively picking up properties that may become economically feasible if the gold price continues to rise. Typically, these companies are lean and mean, comprised of a few experienced mine finders with little support staff.” Mapa said it will be these junior companies and individuals that will take the lead and the risk. He figures the juniors will again spark spending and that consulting firms like Whitney & Whitney will provide manpower and technical services.
Mapa noted that classified ads have appeared recently in The Reno Gazette Journal seeking drilling personnel. It begins, he said, with gold prices high enough to generate projects that interest investors. This then leads to drilling and more exploration.
Why aren’t the majors leading the exploration?
Dobro has also seen the beginnings of new investments in Nevada, but said much of the majors’ exploration is confined to the properties they already own. Some are also searching on foreign soil. He and Fields agree that the reason for foreign exploration is not the conventionally held belief that foreign labor is cheaper, or that mining regulations are laxer in developing countries. “It all boils down to cost per ounce,” said Field on the subject of cheap labor. “Is it less expensive to employ 15 people or one big truck?”
Both agreed the environmental standards around the world were about the same. When a project is funded, the lending bank will demand U.S. standards, Dobro explained. The real difference between foreign and domestic mining is “how many hoops you have to jump through to get to the same place.” Over the last 10 years in the U.S., he said, the time needed to get a mine permitted has gone from two years to three years to four years. The recently-permitted Pipeline project in Lander County took five years. In contrast, he said, in the early ’80s, Paradise Peak went from discovery to production in 18 months. Companies spend a lot of money to find something, then have to spend millions to get permitted. In the ’80s half of all exploration dollars were spent in the U.S., and most of that in Nevada. Today, said Dobro, “We’re lucky if it’s 10 percent.”
What does make Nevada worth looking at again, he said, is the present administration’s softening of onerous Clinton administration regulations that were “clearly designed to stop new mines.” He said, the softening was “necessary but not sufficient ” The gold price must also stay high.
Foreign venues often offer much faster (read less expensive) permitting time and in many instances the grades may be higher as well. The major producers have evolved into truly global companies and as Fields remarked, “have no problem going anywhere in the world where they can get the best return for their stockholders.”
All things considered, Nevada’s gold mining future is dependent on gold prices remaining above $300. Dobro says the increases of the past half-year are due mostly to gold hoarding in the Far East and Middle East. Recently, Japanese hoarding has increased 10-fold. Gold is finding favor again in the U.S. as a safe harbor against inflation and in response to a less than comfortable political situation. Still, American consumption remains a drop in the bucket when compared to that of other countries. For example, in 1999, U.S. personal consumption of gold totaled about 40 tons. People in India purchased 400 tons.
The recent higher price is going to have to prove stable before caution is thrown to the wind. As Wayne Murdy, Newmont CEO said early this year, “We realize that gold remains volatile…We adjust our operations to the spot gold price on an ongoing basis.”
