Extra items pump up Placer earnings

Vancouver Extraordinary items propelled Placer Dome (PDG-T) to a US$66 million, or US$0.16 per share profit in the second quarter of 2003.

The surging profit included a US$16 million derivative gain and US$39 million tax benefit. Excluding the special items, the major made US$11 million, or US$0.03 per share compared to a profit of US$44 million, or US$0.13 per share tallied in the second quarter of 2002. Cash flow from operations also took a hit in the quarter coming in at US$58 million or US$0.14 cents a share, down from US$76 million or US$0.23 cents a share in the same 2002 period.

Driving the short fall was a number of items, including higher energy costs, and currency movements: the stronger Canadian and Australian dollars and higher South African rand increased operating costs in those countries

"Right now, we’re into a period where we’ve got some pressure on our margin,” says Placer President, Jay Taylor. "Our big challenge right now is to speak to the pressure that we’re getting from costs, that is primarily driven by energy and foreign exchange.”

The company had a “small amount” of currency hedging positions in place and may consider increasing it.

“It is not a fundamental solution to industry cost pressures,” says CFO Rex McLennan, "the focus should rather be to maintain high quality operations."

Placer produced 905,000 oz of gold in the second quarter at a cash cost of US$222 per oz and a total production cost of US$283 per oz. A year earlier, the major cranked out 670,000 oz at a cash cost of US$175 per oz and total production cost of US$219 per oz. The 35% jump in output is due to the acquisition of Aussie miner AurionGold in late 2002.

“More than 75% of Placer Dome’s production is outside the U.S., and we are therefore significantly exposed to foreign currency moves,” adds McLennan. "Local currencies in several of our operating jurisdictions have been strengthening faster than the U.S. dollar gold price has been rising."

Going forward cash production costs are now forecast to increase to US$210-to-US$215 an oz, and total production costs are forecast to average US$270-to-US$275 an oz.

Placer Dome realized an average spot price of US$365 per oz. during the quarter — a US$18-per-oz. premium over the average spot price of gold.

The company also reduced the number of committed ounces in its gold sales and derivative program by 1.1 million oz., to 10.8 million oz. The company plans to reduce its committed ounces to below 10 million (excluding hedges from the newly acquired East African Gold Mines) by the end of this year, which would represent a total reduction of its hedge book by more than 20%. At June 30, 2003, the mark-to-market value of the company’s hedge program was a positive US$223 million at the quarter’s closing gold price of US$$346 per oz.

Says McLennan: “Our hedge book continues to generate positive cash flow even at a time when quarterly spot prices were the highest in six and a half years, and is the only positive hedge book among the North American senior producers.”

For the quarter, Placer cranked out 108 million lbs. (49,000 tonnes) of copper at cash and total costs of US54 and US69 per lb., respectively, basically unchanged from last year’s output with cost ringing in at US46 and US61.

Placer attributes the lower production and higher cash and total costs to lower production at the Osborne mine in Australia combined with higher energy costs, the appreciation of the Australian dollar, higher acid expenditures, and unplanned maintenance costs at the Zaldivar mine in Chile.

Revenue from copper sales totalled US$73 million, compared with US$64 million in the year-earlier quarter, reflecting a 4% increase in Placer’s average realized price of copper to US75 per lb. The copper operations added US$5 million for the major during the quarter compared with US$9 million in the second quarter of 2002.

Production at the Golden Sunlight mine was up 194%, chiefly because last year’s mine feed was supplemented by lower-grade stockpiles. The orebody is expected to be depleted by the end of the fourth quarter.

Meanwhile, development of the Turquoise Ridge gold mine on the Getchell property is underway, and full production of 300,000 oz. per year should be reached by Nov. 2004. Over a mine life of nine years, Turquoise Ridge is expected to produce at cash and total costs of US$215 and US$265 per oz., respectively, with capital costs ringing in at US$80 million.

At the Cortez mine, a 60-40 joint venture with Kennecott Explorations (Australia), production decreased by 14% from a year ago, thanks to lower grades.

At the Porgera mine, in Papua New Guinea, Placer Dome’s share of production during the first quarter was up 69% over the corresponding period in 2002. That’s because the company increased its ownership by 25% as a result of the AurionGold acquisition, though higher grades and enhanced recoveries contributed to the production rise. However, cash costs amounted to US$304 per oz., or 21% higher than in the year-earlier quarter, reflecting steeper fuel costs and maintenance work on the mill and mobile equipment. The joint venture’s updated forecast for 2003 calls for cash and total cost per ounce of US$255 and US$300, up from the US$239 and US$296 per oz previously estimated.

At the Granny Smith mine in Australia, Placer’s share of production was down 26%, owing to harder ore in the Wallaby pit and the use of low-grade ore to supplement mill feed. Offsetting that was Placer’s acquisition of the remaining 40% of the mine as a result of the AurionGold deal. Cash costs increased 98% to US$212 per oz. because of the lower gold pro

The newly acquired Kalgoorlie West and Kanowna Belle mines, in Australia, performed above expectations. Kalgoorlie West cranked out 11,471 oz. at cash and total costs of US$243 and US$342 per oz., respectively, whereas Kanowna Belle produced 65,051 oz. at cash cost of US$220.duction, higher fuel costs and the appreciation of the Australian currency.

At the 50%-owned South Deep mine in South Africa, Placer’s share of production during the recent quarter was 55,830 oz., a 28% increase over the comparable period last year. This is the highest quarterly output at South Deep since Placer entered into the joint venture and is due to higher throughput and grades. On the other hand, cash and production costs increased by 36% and 33%, respectively.

Closer to home, at the Campbell mine in Ontario, production in the quarter increased by 4% compared with the first quarter of 2002, mainly because of increased throughput.

At the Musselwhite Mine, Placer’s share of production for the second quarter of 2003 was 43% higher than the prior year period due to increased throughput. Cash cost per ounce for the quarter was US$239, or 4% less than the prior year period as the increased production was mostly offset by higher energy costs, increased maintenance costs and the stronger Canadian dollar.

Placer’s share of production in the second quarter of 2003 for the Porcupine Joint Venture was 7% higher than from the Dome mine in the prior year period due to higher-grade ore from the Hoyle Pond mine. Cash costs per ounce were positively impacted by the increase in production partially offset by higher energy costs and the stronger Canadian dollar.

"Over the past year we have achieved success on a number of fronts,” adds Taylor. “We have completed two significant acquisitions, enjoyed exploration success at several properties, consolidated joint venture interests, and progressed a number of key development projects."

Last year, Placer swallowed Australia’s AurionGold, and this month it announced the purchase of Australian junior East African Gold Mines, which operates a gold mine in Tanzania.

With the East Africa Gold Mines acquisition, Placer now expects to produce 3.6 million ozs of gold in 2003. In the current exchange rate environment, full-year operating costs are now forecast at US$210-to-US$215 per oz for cash costs and US$270-to-US$275 per oz for total costs.

According to Tayl
or, Placer is “in transition” as it assimilates newly acquired assets, "I look forward to better results at the back end of the year or early next year."