Gold mining: Squandered opportunity – by James Wilson (Financial Times – January 14, 2014)

In the vast open pit at Goldstrike, electric shovels 20 metres tall crunch easily through the rock of northern Nevada. Three scoops fill a truck that hauls off 300 tonnes of gold-bearing ore, while underground teams nearby bore richer deposits at 25 metres a day.

The site, excavated over almost three decades, set Barrick Gold on its way to becoming the world’s largest gold miner. Yet more than 9,000km to the south, at a mine the company hopes will one day be as successful, things are very different.

Pascua Lama, 5,000 metres up in the Andes straddling Chile and Argentina, has been blighted by cost overruns and environmental disputes. Barrick has written off more than $5bn on the incomplete project: engineers are now putting it into what might be a long hibernation until the gold price – and the Canadian company’s balance sheet – recover.

The tale of two mines epitomises the profound change in fortunes for the gold mining industry. Barrick and its peers once enjoyed premium valuations as eager investors anticipated outsized returns from a climbing gold price. Profits flowed easily from the likes of Goldstrike’s 2m ounces of annual production in pro-mining and accessible jurisdictions such as Nevada. Now, mishandled investments and bloated projects have taken the shine off gold miners, which in recent years have generally underperformed the metal itself. Peter Munk, the Canadian entrepreneur who built Barrick, steps down as chairman this year with a shadow cast over the end of his career by his company’s problems.

Deutsche Bank says the four largest North American gold companies – Barrick, Newmont, Goldcorp and Kinross – are worth less than in 2006, when gold was half today’s price of around $1,245 per oz. The value of AngloGold Ashanti, the South African miner that is the world’s third-largest producer by output, has fallen by more than 40 per cent over the same period.

Further disappointments await. Some of the world’s largest gold miners are expected soon to announce cuts to the reserves they calculate are in the ground, acknowledging that millions of ounces of ore are no longer economic to mine as the gold price has tumbled.

For some investors, this is more than just an inevitable turn of the commodity price wheel of fortune in a cyclical industry. They hope 2014 will bring a fundamental rethink of the “big gold” model that created sprawling companies such as Barrick and Newmont – each producing more than 5m oz of gold annually – while doing little to satisfy shareholders.

“We need to see a cleansing of the sector that allows companies to ’fess up to the mistakes they have made and reset the dial,” says Evy Hambro, co-manager of the BlackRock World Mining Trust. “Many gold companies have been growing for the sake of growth, often financed with share issues – and that has ultimately watered down returns for investors. Companies have been going backwards rather than forwards from an investor point of view.”

Some miners are still gunning for growth. This week Goldcorp, which has come to rival Barrick as the world’s most valuable gold miner, unveiled a hostile C$2.6bn bid for Osisko, a Canadian rival.

For others, the need for change has been more urgent. Barrick raised $3bn in equity in November to shore up its finances by paying off part of its load of debt. Many analysts expect other gold miners to try to come back to markets for more cash – a tall order if investors have lost trust.

Moreover, this is the first crisis to envelop miners since most abandoned hedging, and following the creation of exchange traded funds in gold – simple instruments that have given many investors the exposure they want to the metal without the complications and risks of holding companies’ shares. Companies could face even frostier times ahead unless they can restore faith that, through growth or dividends, they can provide returns that are better than can be obtained from simply holding gold.

Neil Gregson, a fund manager at JPMorgan Asset Management, says miners became lazy in the way they ran their businesses as the price of gold rose 600 per cent in the first 11 years of the century. “They thought that the gold price would always save them,” he says. “They lost touch with their operations.”

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