Thursday May 21, 2015, 2:20pm PDT
By Contributor+ - Exclusive to Gold Investing News
By Robert R. Ferguson
Excessive global expansion by North American mining companies over the past several years has exposed companies to unnecessary risks and large, unexpected losses. In search of more stable political environments, companies are returning home to Ontario and Quebec, while places like Washington state, California and Oregon are attracting new investment for the first time in decades.
Global expansion for larger mining companies was initially driven by a need to diversify into different sales markets and financial regimes; however, for many companies the drive was the lure of mineral wealth in less-explored, but risky, countries. This trend pervaded the sector, and with numerous failures, many companies are now licking their wounds. Prior to writing down billions of dollars in losses, many North American mining companies were actively exploring and acquiring mineral properties in parts of Asia, Eastern Europe, Africa and South America that turned out to be very unfavorable for mining investment.
Canadian miners including Goldcorp (TSX:G,NYSE:GG), Kinross Gold (TSX:K,NYSE:KGC) and Barrick Gold (TSX:ABX,NYSE:ABX) are good examples of the North American mining sector’s rapid global expansion. Barrick was drawn to Zambia by expectations of large ore deposits and low operating costs. However, a royalty rate hike by the Zambian government triggered a monstrous $4.2-billion writedown on its Lumwana mine. A few months ago, Barrick announced another $2.8-billion writedown for two mines that will be sold. One of the mines to be sold is the large Porgera mine in Papua New Guinea. Even though Porgera produced nearly 500,000 ounces for Barrick in 2014, it was plagued with violence and hostility. Barrick has reported that it is refocusing on its Nevada projects, where it expects to get the best return.
Kinross acquired the Fruta del Norte deposit in Ecuador in 2008. After a long battle with the Ecuadorian government, Kinross divested the project at a loss of nearly a billion dollars. Losses at Fruta del Norte are estimated to be equivalent to the profits yielded by the company’s Buckhorn deposit in Washington state over the same period of time. Kinross’ Kupol project is a large, high-grade, low-cost producer — a miner’s dream, with the exception that it is in Russia. Until President Putin ceases his imperial aggression, sanctions, political uncertainty and a volatile ruble add major risks to this project. Even with recent improvements to the Russian economy, it would be a good bet that Kinross is mining its Russian deposits as fast as possible to get as much ore out while it can.
Foreign investment is not only affected by political instability; production losses due to events such as power rationing in Ghana and Brazil is also a risk reality for Kinross. As recently as a few months ago, Kinross initiated exploration in Canada around Val d’Or. Its mining operations in Nevada, Alaska and Washington state represent long-term profit centers for the company and provide significant growth opportunities as they utilize existing infrastructure and development.
Goldcorp finished construction of the Cerro Negro project in Argentina, and only five months after its first gold pour wrote down $2.3 billion on the project due to import restrictions and limits on converting the local currency into dollars. Ouch! Goldcorp recently showed its intentions of refocusing in North America through its acquisition of Probe Mines.
There is no question that there is a renewed interest in mining in North America, and unexpectedly all of this interest is not going into Nevada, one of the world’s most prolific gold-producing areas. Canadian mid-tier producer Alamos Gold (TSX:AGI,NYSE:AGI), a well-established miner in Mexico, recently acquired a significant gold project in Oregon.
Areas such as Washington state are becoming more active and have attracted Canadian companies. Washington is historically a mining region known for high-grade gold deposits, but over the past two decades there has been little exploration activity. These areas are therefore underexplored by modern methods. Junior mining companies like Adamera Minerals (TSXV:ADZ) recognize the opportunity and are aggressively targeting these areas with precise, low-cost exploration campaigns that take advantage of infrastructure — and in the case of Washington state, an underutilized mill owned by Kinross.
The mining industry is based on discoveries, and companies often look for the next frontier. If reducing risk is a driver, companies will refocus investment funds in North America, especially the US, making the US the next discovery frontier.
In this risk-averse environment, Canada and the US are attractive for mining investment. The US has an advantage over Canada in that many parts of the US with well-developed infrastructure are underexplored by modern methods. In the long run, that will outweigh the current Canadian-US dollar exchange rate. The US is emerging as the next discovery frontier.
Companies have started to rethink their global expansion strategies because investors are demanding it. Having secure land titles, well-developed infrastructure, dependable mining laws and political stability are cornerstones in the mining industry, not luxuries.
Securities Disclosure: I, Robert R. Ferguson, am not being compensated by any of the companies mentioned herein, nor do I own any shares in these companies.
Robert R. Ferguson has over 25 years of expertise in mining sector communications and marketing. He has consulted or worked directly with companies such as Eldorado Gold, Adriana Resources, Grayd Resources and Timmins Gold. Robert has also served as both director and officer to numerous companies throughout his career.