In
terms of gold mining revenues, 2012 is expected to be another year of
strong performances. Gold miners’ production costs are expected to
continue rising, but as in 2011, gold prices are likely to continue
providing insulation from most financial pressures. Still, gold miners
will face their share of challenges in 2012 and beyond.
Low-grade mining
Gold
miners are going to find themselves paying more to get less. Companies
will need to devote more money to their exploration budgets, but in most
cases, where there is return, it will be in the form of lower-grade
resources. Large high-grade discoveries are hard to find.
Given
current gold prices, increased numbers of low-grade projects may be
deemed more economic than in the past, but they will also be more
sensitive to rising production costs.
With regards to low-grade projects, Steven Letwin, CEO of IAMGOLD (NYSE:IAG,TSX:IMG), said every penny makes a difference with respect to cost.
Furthermore,
exploration and development projects are increasingly requiring gold
miners to operate in underdeveloped locations. This often presents a
host of challenges, many of which boost costs, especially with regards
to accessing the needed infrastructure and electricity.
Letwin said it is going to be difficult for anyone to produce gold at less than $1,200 per ounce in terms of new discoveries.
Wage disputes
One
result of high gold prices is higher expectations from workers. Demands
for better wages and benefits have been on the rise and aren’t likely
to subside.
Yesterday, Centerra Gold (TSX:CG) announced
that unionized workers at its Kumtor mine are embarking on an illegal
strike associated with demands that the company pay the mandatory
employee contribution to the Kyrgyz Republic social fund. As a result,
operations have been suspended. Further, Centerra has already said that
any stoppages could have a significant impact on its ability to achieve the forecasted production.
Of 99
mining strikes which occurred from January 1, 2009 to December 1, 2011,
most were at gold mines, and 70 percent were related to demands for
higher wages, according to the 2012 Gold Price Report by Price water
house Coopers (PwC).
These
companies experienced an average production decline of 550 ounces per
day, and the strikes often acted as a drag on their stock prices. The
PwC report found that 53 percent of those companies saw their stock
price decrease the day after a strike.
Investors
John Gravelle, Mining Leader for PwC, says
investors are hesitant to get back into the market for equities. Last
year’s market volatility has made risk, or even the perception of it, a
much harder sell.
Miners
are well aware that their business involves risks such as labor strikes
and geopolitical issues, but is necessary to come to terms with the
fact that investors are aware too. As other gold investment options,
such as bullion or ETFs, are arguably safer, when investors do have
the nerve to put money into gold mining equities, they also have
mounting expectations. Attractive dividend policies are expected to be a
persistent issue.
More
companies are implementing dividends or increasing them, but gold
miners need to make sure that pressure doesn’t skew their judgment.
Dividend policies need to be both attractive and sustainable.
Companies should give adequate consideration to whether their strategy
for divvying up the wealth will conflict with their growth and other
financial demands. Having to reduce or eliminate dividends tends to send
a negative message.
Labor
Another
labor-related challenge for gold miners is finding an adequate supply.
As it stands, the scramble for workers is expected to intensify, and the
more specialized the skills required, the more severe the problem is
likely to become.
The Australian Mines and Metals Association has warned
that hundreds of billions of dollars worth of the nation’s mining
projects are at risk of struggling to survive or never coming to
fruition if labor supply is not addressed.
For gold miners, the problem is aggravated by the obscure location in which many gold projects are located.
Letwin said that it is becoming increasingly difficult to attract talent to remote locations.
As
gold miners contemplate this issue and attempt to develop strategies to
deal with it, it should be remembered that they are not only competing
with one another for skills and labor, but also with other industries.
Some, such as the petroleum mining industry, are widely perceived
as better employers. Competitive wages and incentives are going to
become more prominent issues.
Accountability
Mounting
concerns about resources funding rebel groups and pending conflict
mineral legislation highlight another issue. In addition to caring about
where miners operate, growing concern about how they operate is coming
from all segments of society.
Gold
miners will need to become accustomed to operating in environments
where they are held to higher standards of accountability and
transparency. The handling of issues such as community development and
environmental protection are going to demand increasing amounts of
attention.
Appeasing
the various segments of society will be a phenomenal challenge. But,
due to the potential for negative backlash from laborers, investors, and
the public, companies are likely to find it beneficial to prioritize
developing policies that avoid and reduce the perception of risks
associated with gold mining.
Securities Disclosure: I, Michelle Smith, do not hold equity interests in any of the companies mentioned in this article.
Gold Prospecting For Fun
Gold Prospecting For Fun
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