The challenge facing the three North American gold mining giants is daunting as they struggle to generate production growth at the same time as they must find almost 17 million ounces of gold a year just to replace reserves.
Toronto-based Barrick Gold Corp. last week unveiled a five-year, $2-billion (U.S.) development program of four new gold mines around the world, and its president, Randall Oliphant, claimed the company will be the gold mining industry's only growth stock.
Barrick, which expects to produce 5.7 million ounces of gold this year, said the additional two million ounces of gold from the new mines will help offset lower production at one of its other mines and help output rise 21 per cent or 1.2 million ounces to 6.9 million ounces in 2006.
One of the four proposed mines, the giant $1.2-billion Pascua Lama project on the border of Chile and Argentina, is expected to begin production at 800,000 ounces a year in 2008.
Denver-based Newmont Mining Corp. is currently producing 7.5 million ounces of gold a year, while Placer Dome Inc. will produce about 3.5 million ounces annually, assuming the Vancouver-based company successfully completes its acquisition of Aurion Gold Ltd. of Australia.
The gold mining industry is facing the prospect of declining production, said Douglas Pollitt, a mining analyst with Pollitt & Co. Inc., a Toronto investment dealer.
"Three of the four projects Barrick announced development plans for have been kicking around for years," he said.
The producers have all been mining high-grade ore in order to help sustain profitability as a result of low gold prices and when they start mining lower-grade ore their production will drop, Mr. Pollitt said.
All three companies -- Barrick, Newmont and Placer Dome -- have also been growing by acquisition and that, in itself, could create problems down the road.
"We just don't have any growth, and the bigger they get the harder it is to get growth," said Victor Flores, a gold mining analyst with HSBC Securities. "We don't have the pipeline of projects we used to have."
Mr. Flores said Newmont has been busy selling assets and developing a strategy following its acquisition of Australia's Normandy Mining Ltd., but it has good assets and a good production outlook.
The gold mining industry has been achieving only modest returns given the risks of mining, Mr. Flores said. Barrick is taking the projects with the best returns and constructing them first, he said.
Assuming an average gold price of $325 an ounce, Barrick estimated its return on equity will increase to 11 per cent from 6.5 per cent. Gold recently traded at $321.90 an ounce.
The industry could use higher gold prices, analysts say. Placer Dome has several projects, including its Getchell property in Nevada that would be a big winner with higher prices, said Mr. Flores, who likes Placer Dome as an investment. Placer Dome has been able to generate good financial returns and its share price is relatively inexpensive compared with the other North American producers, he said.
Brian MacArthur, a mining analyst for UBS Warburg Inc., has made Barrick a "strong buy" with the shares up only 7 per cent during the past year, while gold bullion has risen about 15 per cent during the same period.
Barrick has the highest-rated balance sheet in the gold mining industry and an impressive pipeline of growth projects slated for development over the next six years, Mr. MacArthur said.
Shares of Barrick closed Friday at $27.93 (Canadian) and Placer Dome at $16.43 on the Toronto Stock Exchange. The shares of Newmont closed at $29.15 (U.S.) on the New York Stock Exchange.
© The Globe and Mail
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