New rules could reduce government revenue demands from miners: Steve Todoruk

By Henry Bonner ([email protected])
Sprott Global Resource Investments Ltd.

Reuters reports on June 27, 2013, that the World Gold Council has released a new set of guidelines to report the costs of gold mining. The new guidelines are more comprehensive than previous reporting standards, which made the mining operations of many large miners appear more profitable than they truly were. In particular, the new guideline for “all-in cash costs” takes into account cash spent on exploration, which brings down the true investment value of a gold project. Steve Todoruk, a Senior Investment Executive at Sprott Global Resource Investments Ltd., explained how he sees these affecting investments in gold miners and exploration companies:

The industry has been using cash costs as the standard reference for how much money it takes to produce one ounce of gold. This includes mining, processing, selling and royalty costs, but the method omits several very important costs. The new standards expand on, and more truthfully reflect the actual costs. The “all-in sustaining costs” now include the costs to sustain mine output, while the “all-in cash costs” show the different production costs over the mine’s life.

Mining companies started pushing to clarify the true costs of production over a year ago. Barrick Gold Corp. – the largest gold mining company in the world – had fired its CEO and brought in someone new to turn things around. Seeking to avoid the fate of his predecessor, he instructed the board of directors to start listening to the demands of shareholders. This meant lowering the costs of production and putting an end to new acquisitions with insufficient due diligence – which had resulted in massive write-downs and share dilution. At the same time, big miners had faced costs of building and operating new mines that were skyrocketing.

Meanwhile, Kinross Gold Corp. walked away from the Fruta del Norte deposit in Ecuador. They wrote off one of the most coveted gold deposits in the world, which they had recently acquired for $1.5 billion. The Ecuadorian government believed that with the last few years’ higher gold prices, mining companies such as Kinross were making tremendous amounts of money from mining poor countries’ gold deposits. They dug into the project and demanded significantly higher taxes in order to spread the wealth and fund their country’s social programs.

Actually, mining companies like Kinross had been hiding the true cost to produce an ounce of gold. This led countries, shareholders and investors to overestimate the profits made by mining companies. In fact, mining costs had risen dramatically – a major drag on the gains resulting from a higher gold price.

The World Gold Council’s new accounting standards should help everyone more accurately value these mining companies and their various gold mines. Hopefully, they will be quickly put in place. I expect this could also minimize a portion of the political risk that seeps into these mining projects when metal prices go higher and greedy governments demand a bigger piece of the pie. This almost always translates into dropping share prices, as investors apprehend political risk.

Transparently representing the entire costs of mining to investors and countries involved in mining projects is just one thing the major mining companies need to do to restore investor confidence.

As the majors go, so go the junior exploration companies. The juniors need the majors to clean up their acts and get their houses in order before we are going to see an overall change in sentiment in junior mining stocks. Again, make sure the juniors you have invested in or are thinking of investing in have enough cash in the bank to wait the one to two years it could take for the majors to carry out the tasks at hand.

Steve Todoruk worked as a field geologist for major and junior mining exploration companies after he graduated with a B. Sc. in Geology from the University of British Columbia, in 1985. Steve joined Sprott Global Resource Investments Ltd. in 2003 as a Senior Investment Executive. To contact Steve, e-mail him at [email protected] or call him at 1.800.477.7853.

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