Consolidation, hedging dominate Denver gold show

Delegates at Mining Investment Forum 2000, sponsored by the Denver Gold Group, were in general agreement that the gold sector would benefit from further consolidation.

Over the past several months, two major gold mining mergers have made headlines: Barrick Gold (ABX-T) took out Pangea Goldfields in an all-cash offer worth $200 million to get a lock on assets in Tanzania; and Newmont Mining (NEM-N) made a stock offer for Battle Mountain Gold (BMG-N) in order to pick up the latter’s Nevada assets. (That transaction should be completed in the fourth quarter.)

However, perhaps the most heralded transaction is the one that did not happen: South Africa’s Gold Fields (GOLD-Q) and Toronto-based Franco-Nevada Mining (FN-T) were barred from merging after the South African finance minister decided that the country’s corporate tax base would be eroded if domestic companies pursued growth strategies beyond its borders.

Representatives of both majors attended the 3-day forum. Christopher Thompson, chairman of Gold Fields, said consolidation remains an essential part of his company’s strategy and that he had hoped a Gold Fields-Franco merger would spur other companies to follow suit. Rather, the experience could have the opposite effect, thwarting future transactions with South African companies.

Jay Taylor, president of Placer Dome (PDG-T), said consolidation does not necessarily have to take traditional forms. Joint ventures, of which his company has six, are one way to grow production and lower costs without adding new gold to the market, he said. Consolidating mining camps under one owner is another way to achieve the same goal.

The investment forum was also marked by much discussion about hedging.

The Australia Gold Council chose the occasion to announce that it is adopting new hedging disclosure standards for its members. “Investors rightly expect an adequate level of transparency and disclosure, and we are committed to ensuring that this goal is met by gold producers,” said the Council’s head, Greg Barns.

Many in the industry believe that hedging has contributed to the depressed gold price and, therefore the practice should be discontinued.

Some of this criticism has been directed at Barrick. However, President Randall Oliphant defended his company’s strategy on the grounds that Barrick has, over the past 50 quarters, secured a higher price for its gold than the spot price.

Oliphant said the criticism should instead be directed at producers who use hedging as a means of guaranteeing a floor price for production. Barrick’s mines don’t need hedging in order to be profitable, he stressed, adding that companies should not use the practice to extend the life of marginal mines.