Commodity prices take toll on US mining

As American miners ring in the new year, they are also bidding good riddance to a year they would just as soon forget. Several factors conspired against the U.S. mining industry in 1998, making it one of the most frustrating on record.

Sinking commodity prices led the charge, which was reflected by gyrating stock markets, fostering fears of a nation-wide recession.

The Dow Jones industrial average bounced between bullish new highs and bearish corrections throughout most of the year, leaving investors uncertain about the direction of the national economy. This was unwelcome news to mining investors, who began to sense that a change in the valuation of gold was in the wind.

The year was marked by consistently low prices for gold and copper.

The yellow metal took several serious dips during the last 12 months of 1998, hitting lows that had not been seen in 18 years. Spot prices plummeted to US$274 per oz. and reached no higher than US$314 per oz.

Producers and explorers took the news hard, as mines across the west buckled under the financial pressure. Several mines were forced to close their doors, including smaller producers, such as Hycroft in northwestern Nevada, Mineral Ridge in central Nevada, and Rand in southern California.

The Hycroft open-pit mine, operated by Vista Gold (VGZ-X), was able to push back the closing as far as September, with some fortunate development drilling.

Among the bigger mines, Homestake, near Lead, S.D., shut its doors for a few months in order to reorganize the underground operation in accordance with the lower gold prices. Homestake Mining (HM-N) was able to resume operations in March.

Getchell Gold (GGO-X), Cornucopia Resources (CNP-T), Pegasus Gold and Echo Bay Mines (ECO-X) were all forced to lay off workers. Pegasus cracked under the pressure and filed for bankruptcy protection.

Layoffs took their toll on American mining communities, among them, Elko, Nev. The town, which has a population of 22,000, suffered a serious setback when Newmont Mining (NEM-N) announced it was letting 300 employees go.

Meanwhile, U.S. copper producers are struggling to cope with the most recent fall in price to 67 cents per lb. Many mines are operating at a loss.

Layoffs at the operations of Broken Hill Proprietary (BHP-N) in Arizona and Phelps Dodge (PD-N) in New Mexico have resulted in the loss of nearly 1,000 jobs. In late November, Asarco (AR-N) shut its copper refinery in El Paso, Tex., and further cutbacks are expected.

Silver was billed as the year’s saviour metal, after American tycoon Warren Buffett acquired 129 million oz. in the first quarter. Metal prices soared to above US$7 per oz. before the rally fizzled back to depressed levels.

Adding insult to injury, the state of Montana passed an anti-mining initiative in November that would outlaw the use of cyanide in new projects.

At issue are two controversial projects: McDonald, held by the teetering Canyon Resource (CAU-X), and Golden Sunlight, operated by Placer Dome (PDG-N). Canyon, which was in the midst of permitting McDonald, closed the process prior to the November elections and had to sell its industrial minerals division for US$6 million to keep the company afloat.

Canyon and Golden Sunlight, with the help of legal counsel and the Northwest Mining Association, plan to challenge the election outcome in the courts.

The group was already successful in striking down a previous ballot initiative which outlawed campaign contributions by for-profit companies in October.

Yet all was not doom and gloom in the U.S. mining industry. The emphasis on production and exploration in Nevada has reverted to grade — the higher the better. Early December saw the first gold pour at the Ken Snyder mine, jointly operated by Franco-Nevada Mining (FN-T) and Euro-Nevada Mining (EN-T). Management anticipated the cost of production to be around US$80 per oz., with headgrades above 1 oz. per ton.

Exploration companies have followed suit, changing their focus to Ken Snyder-like targets. Toronto-based Romarco Minerals (R-T) has had some early success with its Red Rocks property in western Nevada near Tonopah, and the Jake Creek property near Midas. The company plans to carry out further drilling at both targets.

As the year drew to a close, Placer announced a takeover bid for Getchell Gold in a stock deal valued at US$1 billion. Placer agreed to pay US$34.45 per Getchell share, which was valued at US$16.19 on the day of the transaction.

Other mergers and acquisitions are likely to play a large part in mining during 1999, particularly if lower gold prices keep diminishing the share values of companies.