Gold hits record high, but miners worry as oil soars

Gold prices top all-time highs as the unrest in the Middle East and North Africa continues, but the news isn't all good for those mining the metal.

By TheStreet Staff Mar 2, 2011 1:00PM

Gold © Comstock Images/JupiterimagesthestreetBy Alix Steel, TheStreet


Updated at 4:33 p.m. ET


The unrest in Libya and other oil-producing nations has helped gold prices soar to record highs, but it is simultaneously hurting companies that mine the metal as oil prices surge.


On the one hand, recent violence in Libya has helped gold reclaim its identity as a haven asset, pushing the metal up to another record close Wednesday. Gold for April delivery rallied $6.50 to settle at $1,437.70 an ounce at the Comex division of the New York Mercantile Exchange. Gold hit a high of $1,441 -- a new intraday record-- and traded as low as $1428.20 in today’s session.


High gold prices can keep miners rolling in dough as low cash costs mean high profit margins. But the biggest roadblock gold companies are confronting now is higher oil prices, which can eat into these profits. Oil topped $100 a barrel Tuesday and was trading above that level today, while Brent crude touched $116 on Tuesday.


Many investors had been wondering if oil's recent spike would prompt the Federal Reserve to tighten the money supply to cool inflation. But Federal Reserve chairman Ben Bernanke intimated in his testimony to the House Financial Services Committee Tuesday and Wednesday that he isn't ruling out a third round of quantitative easing, despite surging oil prices and the slowly improving employment landscape.


Gold mining CEOs attending the BMO Capital Markets Global Metals & Mining conference in Hollywood, Fla., Monday and Tuesday unanimously put oil at the top of their risk lists.

Jeff Pontius, CEO of International Tower Hill (THM), a Canadian miner with a 10 million ounce gold deposit in Alaska, says "we do see inflation in a number of places, fuel, of course, is always a big deal." International Tower Hill will start producing in 2016. The company will complete its pre-feasibility study in 2011.


To try to combat skyrocketing oil, International Tower Hill is buying its own fuel and then supplying it to the drillers to make sure they aren't overpaying. "Typically if (drillers are) buying the fuel they're going to try and put into their bid additional money." Pontius is gearing up for the volatility, financially prepared for oil prices between $80 and $100 a barrel.


Helping the company is the strength of the Canadian dollar against the U.S. dollar, a trend that's increased International Tower Hill's purchasing power. The company is also leaning on Alaska to provide it with alternative energy options.


"There's a number of initiatives in Alaska to bring natural gas down to Fairbanks, which potentially would provide us with on-site gas," Pontius said. Alaska is also looking into a hydro project, or water-based energy, to lessen its dependence on oil. Shares of THM slipped 1.6% to close at $9.40 Wednesday.


Mark Bristow, CEO of Randgold Resources (GOLD), a West African gold miner, says "oil is the big inflator where we are." Randgold is expecting to produce 750,000 to 790,000 ounces of gold in 2011 at cash costs below $600.


Randgold is charting a similar course as International Tower Hill. "Our production profile and our energy profile change quite a lot over the next five years as we move from diesel generator ... to grid power in the Ivory Coast to hydropower in the Congo," said Bristow. These moves are expected to reduce emissions and kilowatt cost.


In the meantime, oil prices will hurt but Bristow is prepared. "We've been to $140 (a barrel) before . . . it puts some pressure on our costs but we're eminently profitable," he said. The company made 29 cents in the fourth quarter and can make big money as long as gold stays over $900 an ounce. Randgold Resources fell 0.6% to $81.49.


Rick Van Nieuwenhuyse, CEO of NovaGold (NG), warns "if oil continues to go up that will have reverberations around the industry . . . if it goes too high that can affect the world economy and then things slow back down again."


NovaGold is in the process of revising its 2009 feasibility study at Donlin Creek, its large gold deposit in Alaska, to incorporate a natural gas pipeline, which could reduce costs by 25%.


At its other big deposit, copper mine Galore in British Columbia, the provincial and federal government have teamed up to build the power infrastructure for the main power corridor in the region. NovaGold slipped 0.6% Wednesday to $14.26.


Barrick Gold (ABX), the biggest gold miner in the world, is not immune to higher oil prices. CEO Aaron Regent said that cash costs for 2011 will be 10% higher with 5% of that increase coming from rising energy costs.

To mitigate the risk, Barrick has effectively hedged oil at $85 a barrel. "We have an energy division within Barrick which produces about half of the requirements," says Regent. "Then we have financial contracts for the balance." Barrick Gold added 0.2% to finish at $53.88.


Goldcorp (GG) is in a similar boat to Barrick. CEO Chuck Jeannes said in 2011 there will be a "6% absolute dollar increase year on year" due to inflation, the most painful aspect being high oil prices.


Jeannes blames uncertainty in the Middle East leading to uncertainty in oil prices, which causes price uncertainty for the company. For its part, Goldcorp has hedges on oil and in its operations in Mexico, which use a lot of fuel, the government sets the price. Nevertheless, Goldcorp is still building a natural gas power plant in Mexico to help cost issues. Shares of Goldcorp closed up 0.6% at $49.61.


Gold Fields (GFI) CEO Nick Holland says "oil prices in particular can have a profound impact on the open pit operations because of the . . . distances out of the pit (and to the factories) . . . and we may have to re-engineer the way we do things."


Holland is thinking about a conveyer system in areas where the company is vulnerable and, in the future, would consider new operations that don't require a large amount of oil. The CEO believes that oil prices could hit $150 a barrel in a few years and warns that the gold mining industry has "to start factoring that in." Gold Fields rallied 1.4% to $18.13.


Agnico-Eagle (AEM) is trying to do just that, but much of the company's operations are in the Arctic and CEO Sean Boyd says there are no alternatives to diesel right now. "We look closely at hedging. We have hedged diesel."


Agnico-Eagle has its fuel requirements for Meadowbank, in Nunavut Canada, at $80 a barrel until September 2011. Boyd says liquid natural gas might be an option in the far future, but that Agnico-Eagle is stuck with oil for now. AEM finished flat at $72.11.


Whether a big producer or small explorer, the theme is clear at BMO: High oil prices are becoming the Achilles' heel for gold miners.


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