Gold producers squeezed by rising costs and sliding prices – by Tim Kiladze (Globe and Mail – August 12, 2013)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

Midway through his master’s degree in geology in the 1980s, Brian Christie trekked to the Red Lake gold mine in Northwestern Ontario as part of a research project. About 930 metres deep, more than one and a half times the CN Tower’s height, the remote mining project was a treat for a geology student eager to make his mark in the industry.

At the time, Red Lake was near the top of the list of the world’s most important gold mines in terms of grade and volume. Even today, after decades of production, some areas of the mine produce 57 grams of the gold per tonne – many multiples ahead of the industry average.

Yet the enthusiasm for projects such as that once drew Mr. Christie to research Red Lake has been undercut by a 10-month slide in gold prices and at least $23-billion worth of writedowns by Canadian gold miners over the past year and a half.

Today, Red Lake’s high-grade gold is found as far down as 2,350 metres, about four times the CN Tower’s height, which shows the difficulty gold miners face in trying to boost their stock valuations even if prices for the precious metal rebound. The deeper a mine, the longer its ramps and shafts must be, and the more energy required, to transport gold to the surface. “Obviously, your costs are going up,” said Mr. Christie, now a vice-president at Agnico Eagle Mines Ltd.

As bullion soared to $1,900 (U.S.) an ounce, few people cared about expenses. But after the sudden sell-off this spring, investors are panicking.

With bullion now at $1,313 an ounce, Barrick Gold Corp. trades for just $17.42 a share, a level last seen in 1993. The gold price then: $330 per ounce. Using gold prices to gauge the prospects for miners of the commodity has become more difficult because cost inflation and the industry’s reliance on low-grade projects have wreaked havoc on the companies’ balance sheets.

Because much of the world’s top-notch ore has already been unearthed, miners have resorted to developing much less profitable projects. Canada’s Iamgold Corp., for one, currently operates two mines in West Africa and Suriname, and the average grade across both is just one gram of gold per tonne.

At this level, much more dirt must be dug up and processed to produce one ounce of gold. “There’s no substitute for grade,” Steve Letwin, Iamgold’s chief executive officer, said in an interview, adding that his company now has no option but “to become excellent at what we do.”

Iamgold is not alone. In the decade from 2001 to 2011, the weighted-average grade of gold produced globally fell by more than a quarter, to just 1.5 grams per tonne from over 2 grams, according to the SNL Metals Economics Group. And over the past 15 years, 40 per cent of all gold discovered has come with an average grade of 0.7 grams per tonne.

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