Nevada pins hopes on higher gold price

For the first time in several years, there’s some cautious optimism in Nevada’s precious metals industry.

Even though gold prices averaged US$271 per oz. in 2001, versus US$279 in the two previous years, and state-wide production fell to 8.1 million oz. in 2001 from 8.6 million oz. in 2000, investors are encouraged that the price of gold broke through the US$300-per-oz. barrier in early 2002 and has averaged $303.10 in the first half of the year. That price increase provides some hope that the slump that has affected the industry since 1997 may be coming to a close.

Silver production also declined, to 17.5 million oz. in 2001 from 23.2 million oz. in 2000. The reduction was primarily due to the winding-down of production at the McCoy-Cove mine in Lander Cty.

The value of gold and silver production in 2001 was US$2.2 billion from gold production and US$76 million from silver for a total of US$2.28 billion. These two commodities accounted for 91% of the value of all minerals (excluding oil and geothermal energy) produced in the state in 2001.

Among the concerns still facing the industry are rising energy costs and uncertainty over energy supplies. Another is the state of the insurance industry, which has provided reclamation bonding for the industry, as required under state and federal environmental regulations. The insurance companies have been hit hard by a combination of events, including those of Sept. 11, 2001, and the rising costs of lawsuits in various industries. One bonding company serving the mining sector has gone into bankruptcy protection, and others have indicated that they’ll no longer provide the industry with coverage.

Still another concern is the closure of mines.

Low prices and the exhaustion of orebodies have led to the closure of the Dee mine in Elko Cty., as well as the McCoy-Cove mine. Other operations slated to shut down (barring significant gains in the price of gold) are Ruby Hill in Eureka Cty. and Denton-Rawhide in Mineral Cty.

Last year and the first half of 2002 saw greater consolidation in the gold industry worldwide, and among Nevada producers in particular. These mergers are a normal response to a low price environment in any industry as companies seek to reduce costs and become more efficient.

A bright spot in the industry’s performance in 2001 was low production costs. Although total cash production costs rose slightly to US$179 per oz. gold in 2001 from US$170 in 2000, these costs remain among the lowest in the world. Total cash costs exclude non-cash items such as depreciation, depletion and accruals for future reclamation expenditures. Hence, total cash costs do not include the costs of recovering mines’ capital investments and other obligations. Total production costs, which do include these other costs, also increased between 2000 and 2001, to US$245 per oz. from US$226.

Nevada producers ended 2001 with about 72 million oz. in proven and probable gold reserves. This figure indicates that even without further discoveries or any improvement in gold prices, current levels of production could be sustained for roughly the next 10 years.

— The preceding is from The Nevada Miner, published by the Nevada Mining Association. The author is an associate professor of economics at the University of Nevada.