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All That Glitters Is Not Bre X


Finance: GOLD MINING

ALL THAT GLITTERS IS NOT BRE-X

Despite the fiasco, companies are furiously mining the globe

In mid-April, a team of senior executives from Barrick Gold Corp. arrived at a rugged mining camp in Peru known as Pierina. Their mission was to survey Barrick's efforts to build one of the world's lowest-cost gold mines some 14,000 feet up in the Andes, where 6.5 million ounces of gold, worth $2.2 billion, have been discovered. The visit came at a time when the industry was shell-shocked by the scandal surrounding Bre-X Minerals Ltd.'s claim to have found the world's largest gold mine in Indonesia.

Barrick Chairman Peter Munk, who once bid to develop Bre-X, shrugs off the disaster. Instead, he is stepping up his gold quest, and not just at Pierina. On Apr. 25, Munk raised $500 million in 10-year bonds, boosting his war chest to nearly $2 billion. Now, Barrick is on the prowl for companies with rich gold deposits whose stocks have been depressed by Bre-X.

It seems a terrible time to bet on gold. The price of bullion is hovering around $340 an ounce, near a four-year low. On May 4, an independent audit concluded that Bre-X's claim to have found 71 million ounces of gold in Indonesia was a fraud "without precedent in the history of mining anywhere in the world." Yet, like Munk, many execs believe that now is one of the most promising eras ever for prospecting.

VIRGIN LAND. With good reason. Since the cold war ended and the Soviet Union disintegrated, dozens of countries long closed to foreigners have begun welcoming miners. With so much virgin territory in play, spending on nonferrous mineral exploration has surged from $2.1 billion in 1992 to a record $4.6 billion last year, according to Canada's Metals Economics Group. Most of that money is pouring into a great global gold rush.

Intrepid geologists are looking for gold from the jungles of South America to the mountains of Central Asia. Spending on exploration has quadrupled in Latin America, tripled in Asia, and quintupled in Africa in the past five years. Many countries are desperate for the investment and jobs created by new mines. The rush has also been fueled by fortune-seeking investors, who pumped a record $3 billion into smallish Canadian exploration companies, according to Toronto-based Yorkton Securities Inc. All are looking for payoffs such as that from Arequipa Resources Ltd., which discovered Pierina last year. Its stock soared thirteenfold before it was bought by Barrick for $790 million.

At the same time, the well-capitalized major producers--facing declining prospects in South Africa and the U.S.--are going global as well. Just four years ago, Denver-based Newmont Mining Corp. was focused mainly on its U.S. mines. Today, it's the world's second-largest producer, active from Ecuador to Uzbekistan. The payoff is that in many of these rich mines, production costs run as low as $100 an ounce, vs. nearly $300 in South Africa and $240 in the U.S. Toronto-based Barrick has also boosted exploration spending to $139 million from just $15 million in 1993, and established an advisory board, including ex-President George Bush and former Canadian Prime Minister Brian Mulroney, to help open political doors from Santiago to Jakarta. Rarely, says Munk, have "I been so confident and so optimistic." Barrick's stock is down 26% from its peak last fall, but the company's market capitalization has doubled, from $4.4 billion to $8.8 billion, in four years.

Munk is a gold bull, of course. But with the demand for gold surging, his optimism seems well founded. Even as annual production has risen 42%, to 2,346 metric tons, since 1986, demand for fabricated gold has soared 68%, according to Gold Fields Mineral Services Ltd. in London. Central banks, especially in Europe, have made up part of the difference by selling some of their gold hoards. That has depressed prices.

But the bulls believe gold has bottomed and will soon rebound. Demand for gold is exploding in Asia, particularly in India, where it has a quasi-religious significance. In China and Vietnam, where gold is a symbol of wealth, demand has quadrupled since 1990. The Asian market, says Munk, "is the ultimate security on which the future of this industry rests." He and other executives are counting on it to help the price revive to a range of $375 to $400 an ounce in the coming months.

Still, the Bre-X scandal has brought some sobriety back. Optimistic drilling reports had driven the market value of the Calgary (Alta.) company to $5 billion last fall from less than $50 million in early 1995. But the stock plunged some 90% after the true value of its Busang deposit was questioned in late March. And when trading resumed on May 6 following the devastating auditor's report, the stock was essentially wiped out.

The Bre-X collapse has caused lots of pain for other Canadian-based prospectors. Stocks of small, high-risk players are down 50% or more from their highs last year. It will be far more difficult for small companies to raise funds for exploration. "We'll see a dramatic thinning of the ranks over the next year," predicts Robert M.D. Cross, chief executive of Yorkton Securities. Exploration spending is likely to fall from the peak levels it hit last year.

Still, thanks to record sums raised in recent years, many of the exploration companies remain well funded. "There are just too many good opportunities out there" for prospectors to stop now, maintains David Cox, senior research analyst at Metals Economics Group, which tracks exploration.

Perhaps more important, the problems of weaker players may play into the hands of industry giants. As some of the cash-starved smaller companies begin to weaken, they'll create "one of the best opportunities we've had in years" to pick up promising properties at a discount, predicts George H. Plewes, Chairman of Southwestern Gold Corp., which is active in Peru and China.

HIGHER ODDS. Meanwhile, the economics of exploration continues to shift, making untapped markets ever more lucrative. South Africa, which once accounted for 70% of world production, has been in steep decline. Last year, output from its deep underground mines fell 5.5%, to just 21% of world output. In the U.S., the second-largest producer, companies complain that a tougher regulatory environment has made it harder to open new mines.

By contrast, international mining companies are often welcomed as economic saviors in emerging markets. Almost all companies believe their odds of finding huge, low-cost deposits are higher in these relatively unexplored countries than in the picked-over terrain of the U.S. and South Africa. In a business where most discoveries are less than 1 million ounces, Newmont found a total of 8 million--worth $2.7 billion--at its Yanacocha mine in Peru. Because the gold is easily accessible, it costs just $112 an ounce to produce at Yanacocha, less than half the average. And Freeport-McMoRan Copper & Gold is still discovering gold at its Grasberg mine in Indonesia, where reserves are now worth $18 billion.

Emerging-market politicians have taken their cues from Chile, where the global mining rush got its start in the 1980s. Chile became the first mineral-rich developing country to liberalize its mining laws to attract foreign investment. Since then, mining has become the locomotive of Chile's renaissance, accounting for more than half the $15.5 billion of foreign investment in the country. That has boosted mining exports--both copper and gold--to a projected record $8 billion this year and generated 220,000 jobs over the past 10 years, according to the National Mining Society.

The Chilean experience has since been copied by most Latin nations. In 1993, Argentina introduced new laws that capped government royalties at just 3%, exempted foreign producers from import duties, and gave them the right to develop property on the mineral-rich Chilean border. That triggered a stampede in which 72 foreign mining companies have spent some $1 billion to claim promising territory and produce minerals. Mining employment is expected to triple, to 40,000. "This is a dream come true for us," says Miguel Guerrero, Argentina's mining director.

Altogether, some 70 countries have rewritten their mining laws to lure investors. Change is sweeping across Africa. Leading the charge is Ghana's Ashanti Goldfields, which has four operating mines and is exploring in 12 countries, from Mali to Tanzania.

Gold fever even extends into remote Kyrgyzstan, where Canada's Cameco Corp. recently began producing gold at its Kumtor mine in the snow-covered peaks of the Tien Shan mountains. The joint venture with the Kyrgyz state mining company is the largest gold project in a dozen years in the mineral-rich Commonwealth of Independent States and is expected to produce 500,000 ounces of gold a year for the next 15 to 20 years. "It's a huge contribution to our economy," says Dastan Sarygulov, president of Kyrgyzaltyn, the mining company, predicting it will boost the tiny country's $2.7 billion gross domestic product by 19%.

Cameco ran into its share of problems building the mine. Because Kyrgyzstan is one of the most isolated of the former Soviet republics, almost everything, from heavy equipment to food, was shipped in thousands of miles. "Everything you see here we brought here," says John Kazakoff, the joint venture's vice-president for operations, who has worked at the site since 1994. That quadrupled transportation costs and pushed total costs $100 million over projections. To meet demands from the government, the company had to give it a two-thirds' stake in the mine. But with a huge $3 billion lode, it will still be a low-cost mine.

KILLER CROCS. In the jungles of South America, Golden Star Resources Ltd. has faced even more formidable obstacles. The Denver-based company, founded in 1984, is now one of the world's largest specialized exploration companies. Jaguars, wild hogs, and killer crocodiles lurk near the company's properties. Plate-size spiders eat birds, and malaria is a constant threat. Dealing with the locals can also prove challenging. When Golden Star CEO David A. Fennell met with tribal chiefs near one camp, "they had a prayer to the gods that our geologists would have the eyes to see the gold," he recalls. He and his wife also went through a tribal wedding ceremony.

The prayers seem to have done the trick. Golden Star's first success, the 3.2 million-ounce Omai mine in Guyana, was built with Canada's Cambior Inc. in 1993 and now accounts for a fifth of Guyana's gross domestic product. Omai is also a big moneymaker for Golden Star, which retains a 30% stake. This summer, Golden Star and Cambior also plan to build a 2 million-ounce mine in Suriname.

Such examples of continuing work explain why many in the industry believe the gold rush will survive Bre-X. True, the Toronto Stock Exchange's bellwether Gold & Precious Metals Index is down 35% from last year's high, and exploration stocks have been hit even harder. Golden Star is off 59% from the high it hit during the Bre-X frenzy. But some gold bugs are nonetheless urging investors to buy. "There are some incredible values out there," argues James U. Blanchard, editor of Gold Newsletter, who says new discoveries and rising prices could help some gold stocks double in a year. "If you're ever going to buy gold shares," he adds, "this is the time."

Coming so soon after Bre-X, that may seem like dangerous advice. But gold rushes have always been fueled by people willing to take extraordinary risks. Few are likely to wade through the jungles of the Amazon, or venture to the mountains of Central Asia, unless they're possessed by intoxicating dreams combining greed, glory, and gold. It's a mix that can easily spin out of control. But at least for now, the potential rewards seem too great for prospectors with the deepest pockets and the steeliest nerves to pass up.By William C. Symonds in Toronto, with Carol Matlack in Kumtor, Ian Katz in Guiana Shield, Michael Shari in Jakarta, and bureau reportsReturn to top


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