Nuggets of value seen in Canada’s mid-tier gold miners – by Julie Gordon (Reuters/ – July 23, 2012)

TORONTO (Reuters) – While the world’s top gold miners struggle to contain soaring capital costs at multibillion-dollar mega-projects, their mid-tier counterparts are quietly building output through smaller mines at a fraction of the cost.

That means shares of Canada’s Yamana Gold Inc , Alamos Gold Inc and other mid-tier firms are outperforming the Toronto Stock Exchange’s S&P/TSX Global Gold index, which has fallen more than 24 percent this year as gold prices stagnate and costs rise.

“Investors want to see gold companies stop building projects that don’t make sense,” said Darren Lekkerkerker of Pyramis Global Advisors, a Fidelity Investments company. “They do want to see growth, but they want to see it delivered and they want to see it deliver value.”

The portfolio manager, who co-manages the Fidelity Global Natural Resources fund, is bullish on gold. He said mid-tier miners with low cash costs and affordable, near-term development projects offer good value in the current market.

Take Yamana, which started production at its Mercedes mine in Mexico ahead of schedule late last year. The operation cost about $200 million to build and is expected to produce 120,000-150,000 ounces a year.

Toronto-based Yamana plans to start up two more mines this year, with a third going into production in 2013, adding up to about 400,000 ounces of new output between 2011 and 2014 at a total capital cost below $1 billion.

That compares with the $5 billion Barrick Gold Corp , the world’s biggest gold miner, is spending on the 800,000-850,000 ounce Pascua Lama gold mine on the border of Argentina and Chile, or the $4 billion that Barrick competitor Goldcorp Inc will have to spend to bring its El Morro copper-gold project in Chile into production.

With second-quarter results out later this week, investors will watch for cost increases from top miners and for signs that mega-mine developments may be delayed.


The price of gold has more than quintupled in the last decade, from about $300 an ounce in 2002 to just under $1,600 an ounce, a stratospheric rise that has pushed gold miners to seek growth at any cost.

But after centuries of exploitation, large gold deposits are rare. To sustain growth, the world’s top miners are building huge multibillion-dollar mines in remote regions of the globe.

Building a mine where there is no infrastructure is not cheap, and labor and material costs have risen along with metal prices. Even the slightest delay can wreak havoc on a mine’s development budget.

The bigger the project, the more likely are the problems, whether technical, political or community-related, said Morningstar mining analyst Joung Park.

“‘Mega project’ has a nice ring to it, but I think in today’s environment, where capital expenditure inflation is a big concern, smaller to medium-scale projects that have attractive economics are probable perceived more favorably by investors,” he said. “There’s definitely better growth potential with the mid-tiers.”

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