Gold-mining investors cautious amid rising risks

Published: Sept 12, 2012 3:08 p.m. ET




--Mining-sector investors tune in to risks of shifting government policies

--Some "mining friendly" countries consider or adopt new tax levies

--Nationalization worries in the background after moves this year by Bolivia, Argentina

DENVER--Political shifts in some key mining areas are giving some companies headaches and their investors pause.

The risk of nationalization, increased taxation or more complex permitting for new mines--collectively termed "political risk" by the mining industry--occupied much of the discussions between investors and executives at the Denver Gold Forum.

"Investors are now differentiating between political risk from one company to another more than they ever have," said Jamie Sokalsky, chief executive of Barrick Gold Corp. ABX, +2.62% the world's largest gold producer by output, in an interview.

Mining has always carried risk, but until recently investors were mostly concerned about how governments of "frontier" regions such as Mongolia and the Democratic Republic of the Congo handle the development of their resources. Well-established metal producers such as Peru and Australia received less investor scrutiny.

But nationalizations of energy company YPF SA (YPF, YPFD.BA) in Argentina and a zinc and tin mine run by Swiss commodities giant Glencore International PLC (GLEN.LN) in Bolivia have investors and mining executives on edge about projects in South America.

Mitchell Krebs, the chief executive of Coeur d'Alene Mines Corp. CDE, +3.33% which has assets in Argentina and Bolivia, said he was cautious but not about to abandon either project. Mr. Krebs, like many executives here, emphasized the importance of developing a relationship with the communities affected by the presence of mines.

"Before we build anything, we build community relationships," Mr. Krebs said in an interview. "If we don't have that social license, it's not worth digging a teaspoon of dirt out of the ground."

For some, more worrying than the specter of nationalization is new taxes and regulatory burdens in major gold-producing countries. Australia and Peru have implemented levies affecting mining companies this year. South Africa and Ghana, the top two African gold producers, are weighing increased taxes, as is a mineral-rich province in Argentina.

"Increasingly, investors are looking for further transparency from mining companies on these particular hazards in countries not designated as frontier regions," said Sonny Tahiliani, managing director of consultancy MacroMoves.

Executives at Goldcorp Inc. GG, +3.85% and Silver Standard Resources Inc. (SSRI), which have mines in Argentina, said the more burdensome regulations on mining companies had been a topic of discussion with investors here.

"We're managing it," said Charles Jeannes, Goldcorp's chief executive. "It's just adding time, it's adding costs. You need effectively a better project to justify the investment than you would in a low-risk jurisdiction."

Nick Holland, chief executive of South African gold miner Gold Fields Ltd. GFI, +2.75% said part of the reason governments are looking to mining to contribute more to the national coffers has to do with how companies represent their profitability to investors.

Gold miners typically tout their "cash cost," or the total costs to dig metal out of the ground, process it, and take it through to a sale. That excludes big expenses such as cash-intensive expansion projects, other operating costs, and exploration for new metal deposits.

Mr. Holland said cash cost is misleading, and Gold Fields uses a different measure that lumps together all operating costs and capital expenditures, as well as some exploration costs.

"We don't kid the investors," said Mr. Holland. "The people what we're kidding [are] the governments around the world that think they can tax us a lot more."

Goldcorp's Mr. Jeannes agrees. "If a government hears that we're operating at $400 [an ounce] cash costs and gold's selling at $1,600 [an ounce], they assume all of that is profit. I think we could do a better job as an industry explaining the true cost of our business."

"When you have governments around the world in substantial deficit-spending mode, they're looking for new sources of revenue," Mr. Jeannes said. "The mining industry has been very profitable over the last several years. So it's an easy target."

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