After peaking at $1,900 an ounce in August 2011, gold prices tumbled to $1,181 an ounce in June as the economy improved, inflation stayed low and investors worried less about finding a safe haven for their money. Prices had rebounded to $1,307 an ounce by Wednesday, but that was still 31.2 percent below 2011’s high.
To say Nevada’s miners are a little nervous would be like saying refined gold bars are kind of shiny.
“The bear market has lasted longer than many people expected. In the last couple of years, a lot of companies have been treading water, holding their claims and hoping prices go up and allow them to raise capital for exploration,” said Mike Visher, deputy administrator of the Nevada Division of Administrators. “This is not a good time for weak stomachs.”
That means less appetite for gold exploration and production in Nevada. That, in turn, could starve a key sector of the state’s economy. How important is mining to Nevada? Almost 20 percent of the state’s job growth came from mining between 2009 and 2012, though the industry makes up less than 5 percent of the state’s gross domestic product, according to research firm Applied Analysis. Revenue earned in mining, mostly gold, rivals the $10 billion or so in gaming revenue Nevada’s casinos take in each year.
Despite the downturn, experts say Nevada’s in no danger of losing its position as the nation’s — and one of the world’s — biggest gold producers, thanks to its stable regulatory regime, its share of high-grade ore bodies and its predictable production costs. But fluctuating gold prices could make business tough in the next few years, especially for smaller operators or higher-cost mines.
“Overall, the industry is still quite healthy, but things happen when prices fall well below where they’ve been,” said Lou Schack, a spokesman for Barrick Gold Corp., Nevada’s biggest gold miner. “And the fall in prices has been pretty dramatic.”
The exploration slowdown could be dramatic as well.
Dave Shaddrick, a geologist who’s also president and director of the Nevada Mineral Exploration Coalition, called it a “very difficult time” for exploration, particularly for smaller companies. Looking for profitable ore bodies is a high-risk affair, and investors aren’t willing these days to put up money for it.
It’s not a new trend based just on today’s prices: Shaddrick estimates that lack of investment capital has cut exploration in Nevada by 50 percent since 2005, mostly among small, or junior, operators. That could limit future production because smaller companies often find ore bodies and spin off the best ones to bigger companies that can cover the huge capital expenditures of production. Fewer junior companies in the field could mean fewer mines later to feed the long-term pipeline for large operators.
But big miners are feeling the pinch, too.
Consider Barrick’s exploration budget. The company spent $188 million looking for gold in North America — mostly Nevada — in 2012. The forecast for 2013 is half of that, at $94 million, though Schack said that’s still a historically big investment. Most of the decline is at two mines. As a result of low gold prices and “changing priorities” based on market conditions, Barrick has delayed drilling and evaluation of an open-pit expansion associated with its underground mine at Turquoise Ridge in Humboldt County, Schack said. The company also adjusted its drilling and evaluation program at Goldrush in Eureka County.
It’s a similar story for Newmont Mining Corp., Nevada’s second-biggest gold company. Newmont continues to explore at relatively high rates, but it is delaying development of open pits that won’t produce immediately, focusing instead on underground projects that will quickly deliver higher ore grades, said spokeswoman Mary Korpi.
Still, Nevada is faring better than some other jurisdictions. Barrick is closing its exploration office in Australia, and has sold three of its mines there to escape the country’s high labor and energy costs. And in April, a Chilean court limited construction of Barrick’s Pascua-Lama mine in South America over concern about water supplies. The company had already invested $5 billion in the site, Barrick CEO Jamie Sokalsky said in May.
Issues in other jurisdictions give Nevada a bit of an edge in keeping exploration and construction dollars.
“In some parts of the world, returns aren’t what we would like them to be, and we have to make decisions on where we put our money. For us, North America, and Nevada in particular, remains the best place to be spending,” said Andy Bolland, Barrick’s director of operations. “We’re blessed with some really good operations there — good deposits as well as good people. It’s still fairly robust, and all in all, our biggest sites are doing fine.”
And Korpi called Newmont’s North American operation, mostly Nevada, a “core asset,” with its “strong portfolio of longer-life, lower-cost assets” that allow exploration even when prices drop. Newmont is still exploring at its massive Long Canyon project in Elko County, and it continues to drill near existing projects to determine deposit sizes.
Nor is it all doom and gloom for smaller miners.
Pilot Gold, a Canadian company with 45 employees, got the nod in early September from the Bureau of Land Management to boost exploration activities at its Kinsley Mountain site near West Wendover. The exploration site will grow from about 7 acres to more than 70 acres within a project boundary of 2,840 acres.
CEO Matt Lennox-King said Kinsley Mountain’s “fantastic geology” is driving the project forward. The mine produced high-grade ore for another company in the late 1990s, and Pilot Gold expects the same success. And though investors aren’t ponying up as many exploration dollars now, Pilot Gold still has $28 million left from a $40 million round of financing raised a year ago, Lennox-King said. If the company has to make any cuts at all, it’s to smaller, early stage projects outside Nevada.
“We’re making small trims here and there, and not anything drastic,” Lennox-King said.
But Kinsley Mountain isn’t positioned today to help the state’s gold production, which is on a slight downward slide amid lower prices.
HARD TIMES IN 2015?
Numbers from the U.S. Geological Survey show Nevada’s gold output lagging. The state yielded 2.29 million ounces of gold from January through May, down 7.7 percent from 2.48 million ounces in the same period of 2012, as lower prices discouraged production.
The fallout is clear at mines such as Barrick’s Ruby Hill and Allied Nevada Gold Corp.’s Hycroft.
At 60,000 to 80,000 ounces a year, Ruby Hill isn’t one of Barrick’s most important mines. The company’s Cortez operation, for example, generates more than 1 million ounces annually.
But Ruby Hill, with its 120 employees, is the largest private employer in the town of Eureka. That could bringhard times in 2015, when Barrick plans to mothball the mine because of lower gold prices. The staff will drop to about two dozen people. Schack said Barrick expects to absorb most of Ruby Hill’s workers into other operations.
He added that gold prices would need to return to about $1,700 an ounce to make production at the site worthwhile.
Then there’s Hycroft, which Visher called an object example of how the glacial pace of mine permitting can change a project’s fortunes. Allied Gold spent years obtaining federal permits to expand Hycroft, near Winnemucca, from 8,858 acres to 14,753 acres. The project would also add more than 500 employees. By the time the Bureau of Land Management approved expansion in August 2012, Allied Nevada had spent or committed to spend more than $450 million on growing Hycroft.
Then falling gold prices ground the project to a halt: Allied Gold said in August that it would delay construction of Hycroft’s new mill to do a new feasibility study. The company also said its cash flow from operations remained weak, partly from the sharp drop in gold prices.
‘SHARE THE PAIN’
The carnage may not be over. Goldman Sachs set a 2014 target price of $1,050 an ounce in early September, though the Federal Reserve’s Wednesday decision to keep buying bonds to stimulate the economy gave a $50-per-ounce jolt to futures.
But bigger operators, at least, say they’ll cut operations and administrative costs before they slash much more from exploration or production. Barrick has asked suppliers to take a second look at their rates and “share the pain,” Bolland said.
The company also cut workers in June. It eliminated 40 administrative positions from its Nevada work force of 4,500, and it slashed 100 jobs — 30 percent of the total — at its Toronto headquarters.
Newmont downsized as well, paring 33 percent from its headquarters staff in Colorado.
“Mining is a long-term business. We make business decisions with that in mind, and not necessarily based on the day-to-day fluctuations in metal prices,” Korpi said. “The rising costs across our industry, coupled with the continued volatility in metal prices, has only reinforced the need to take action to rein in total costs.”’ Schack said Barrick could sustain a “good chunk” of exploration here at current prices and cash flows. But if gold prices start approaching the company’s production costs, which are now a little below $1,000 an ounce, “things could get pretty serious in a hurry,” he said.
Most miners remain committed to Nevada in the long run, though, and that should eventually mean a rebound for the state’s gold industry.
“In the short term, exploration does slow down,” said Lennox-King, of Pilot Gold. “How long that slowdown lasts, I don’t know. But we strongly believe in Nevada.”