Brazil’s gold premium: just a drop in a $78-billion bucket

Brazil needs cash. And to get it, the government is paying gold miners in the country a 60% premium on the average London fix price to discourage them from selling it outside the country on the black market where prices are often 50% above the London fix.

With annual production of about 2 million oz though, this premium is just a drop in the bucket for a country that owes $78 billion to the world’s banking system.

But for Consolidated TVX of Toronto (the only vehicle for the foreign investor to invest in Brazilian gold mining) a 60% premium is a windfall. With mining costs averaging $200(US) an ounce and a selling price of $600, tvx expects to make earnings of $18-20 million, or 40 cents a share in 1987 and double that in 1988, according to chairman and chief executive officer J. J. Elkin. In the 9-month period ended Sept 30, the company lost 5 cents a share.

The increase should come about as a result of a deal signed last week. In it, tvx will increase its interest in cmp, a 42,000-oz producer, from 14.7% to 44%, increase its interest in Teles Pires Mining, a 10,000-oz alluvial gold producer, from 35% to 51% and acquire a 19% interest in Novo Astro, the richest new gold mine in Brazil, which is expected to produce 60,000 oz of gold this year. As an added incentive to gold mining, the Brazilian government grants a 10-year tax-free holiday on new mines. Mining started at Novo Astro in 1984.

These projects alone should give tvx about 35,000 oz of gold production this year.

Tvx will issue 7.8 million shares to the respective vendors of these properties, bringing its share total to 32.8 million.

“This makes us one of the top 10 Canadian-listed gold companies,” Mr Elkin says. “And falls in line with our objective of increasing gold production by 50% a year.”

The company’s shares traded in Toronto this week at about $10.63.