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Gold industry must rebuild credibility and refine focus – Tumazos

Mining analyst John Tumazos urges the CEOs of major gold companies “to renounce construction of complex large mines, whether in this hemisphere or remote locations.”

Recently at PDAC, mining analyst John Tumazos of John Tumazos Very Independent Research noted he received “an earful from in-my-face managers offended that I did not appreciate the wonderful mines or development projects they had conceived.”

What incurred the managers’ wrath was a February 28th letter Tumazos sent to the CEOs of gold mining companies, Barrick, Newmont, Goldcorp, AngloGold Ashanti, Agnico-Eagle and Kinross, urging them “to renounce construction of complex large mines, whether in this hemisphere or remote locations.”

Tumazos estimated that through February 27th, gold mines have written off $45 billion before taxes for calendar 2013 and “$72 billion since 2008 solely for precious metals aside from copper or energy mishaps. These charges are very large in relation to historic dividends or earnings and have shaken confidence.”

See also: Top 10 gold miners losing billions – but are they really?

In his letter, Tumazos contends “gold mine losses eclipse pretax write-downs since 2008 of declining industries such as $7.3 billion for forest products, $31.9 billion for steel, $19.2 billion for coal, or $1.1 billion for molybdenum.”

“Since 2008 healthier industries like copper wrote off $39 billion, iron ore $20 billion, scrap metals $1,7 billion, aluminum $48.1 billion, nickel $21.5 billion, platinum $2.2 billion, fertilizers $4 billion, and the nongold total since 2008 is $207 billion including rare earths, uranium, diamonds, titanium and others,” he added.

“Gold mines lost more because they invested large sums without enough planning or relying on outsiders targeting insufficient returns to adjust for ore grade, process, permit, construction cost, operating cost, country and tax risks,” he asserted.

Tumazos criticized Barrick, Newmont, Goldcorp, AngloGold Ashanti, Agnico-Eagle and Kinross for “carrying Casale, Conga, El Morro, La Colosa, Meliadine or Tasiast as core projects,” which he believes “suggest a continued willingness to spend billions with underlying uncertainties.”

In his letter, Tumazos urged gold mining CEOs to consider a project outlay cap in the $500 million to $2 billion vicinity “for each of you. Small projects generally are simpler and easier to oversee with lesser environmental or social impacts.”

He also suggested the gold mining companies “discourage any consideration of copper, iron ore and other ventures. Your companies do not have enough capital and need to repay existing debt.”

“Consider the policy of ‘Rob McEwen-era Goldcorp’ of refusing to sell a portion of gold output because prices are too low,” he asked. “Please drive costs and debt down to levels where you are able to defer sales of output in poor markets.”

“Reverse the tendency to increase mining grades at low prices, and vice versa,” Tumazos advised the CEOs. “You should sell more gold at peak prices and less at low prices. The practice of raising grades at price troughs, begun almost a century ago in deep South African mines, shortens the life of the ore bodies, ‘take the eyes’ or cream from ore bodies and reduces average annual revenues.”

In his letter Tumazos suggested, “Projects should be built slowly with much planning, consideration of alternatives, detailed engineering and challenge/renegotiation of outside bids. …Hasty construction without any time to think does not maximize NPV or control costs.”

He also urged the gold companies to “consider ‘clawbacks’ from pay of senior executives, investment bankers, lenders, general contractors, consultants and major suppliers for impaired projects. If such experts decline such arrangements, your shareholders may be better off without them. Cultural norms must reinforce the importance of avoiding large capital risks among external stakeholders too.”

In a March 6th follow-up letter to the gold mining CEOs, Tumazos urged that gold mining companies “require jurisdictions provide a full tax holiday that is nil taxes and royalties, until you recover 120% of investment for large projects like Casale, Pascua, Meliadine or Tasiast.”

“[President] Michele Bachelet in Chile needs to be firmly told that the permit challenges to Pascua-Lama in mid-construction are not acceptable, and it is a ‘black eye’ when the largest Chilean gold and silver project loses over $5 billion,” Tumazos advised.

In his letter, Tumazos noted that on March 5th, former Goldcorp CEO, now McEwen Mining CEO Rob McEwen suggested that “host nations put a large deposit into an overseas escrow account prior to large mine constructions. He believes such escrows should become property of the private companies if host nations violate tax or other agreements.”

Gold mining companies have done many things well, Tumazos observed, “but the size of the particular mistakes overwhelm the successes. The most extreme example is Barrick Gold, where covering the hedge book, buying Lumwana and the Pascua-Lama construction account for ¾ of the $27.7 billion it wrote off since 2008 and those three mistakes overwhelm tens of thousands of small good decisions.”

“It has been painful to listen to recent presentations, especially as companies say they have done a good job to cut costs, raise cut-off grades or blame it on the gold price,” Tumazos complained. “The 2013 cost cuts are the first layer of the onion, where administration, exploration, evaluation or capex should be no more than ¼ of peaks.”

“Investors may applaud your reluctance to explore, build or operate mines,” he said. “Maybe after a five or ten-year or larger lull without major mine constructions, several host nations will be more welcoming to investment and the terms of construction suppliers will become more reasonable.”



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