Valuation of the Mining Industry

Weekly Corporate Growth Report, Feb 7, 2005 by Dolbeck, Andrew

The mining industry covers establishments primarily engaged in the extraction of minerals, coal, and ores from the earth. Industry operations include quarrying, digging, and other operations such as milling, washing, crushing, and screening that are typically performed at the mine site, or as a part of mining activity. The mining industry also covers the exploration for and development of mineral properties, and services performed in the development or operation of mineral properties.

The mining industry provides raw materials for a number of products. International commodity markets are currently strong, due in part to healthy consumption from China and economic improvement in the United States and other parts of the world. The demand for commodities can be expected to drive demand for raw materials, such as metal products, and for the fuel products used to process them, such as coal and oil.

The rising price of oil has impacted the mining industry. Major mining operations such as Ashanti Goldfields have been struggling with the high price of oil, which is integral to mining operations. Oil costs have risen to a point where they can offset increased mining capacity, making it difficult for mining operations to increase profits.

The weak dollar has also had an impact by making debt-service and other operating cost obligations more expensive. The average exchange value of the U.S. dollar versus the euro weakened noticeably in the fourth quarter of 2004. Employment costs have also increased, adding an additional challenge to mining operations.

Fortunately, the price of some mining products has also increased. Gold prices at the London PM fix averaged $433.40 an ounce in the final quarter of 2004, about $32.00 an ounce higher than in the third quarter of that year. According to Gold Fields Mineral Services, the demand for gold used in jewelry rose moderately in the first nine months of 2004 as well. According to research firm Value Line, jewelry demand advanced by 5.4% in terms of unit volume in the first three quarters of 2004.

The demand for coal is also on the rise. Economic growth in China and India has sharply increased demand for coal-fed power and steel. At the same time, the rising cost of natural gas has forced utilities in the US and elsewhere to return to coal as a major source of fuel for electricity generation. Coal plants currently provide about 46 percent of North America's electricity. In recent years, coal has sold for less than $40 per ton. Coal is currently selling as high as $125 a ton and analysts expect further increases in price.

Mining is a high-dollar, international industry. A lot of money changes hands (and borders) in the performance of mining operations. For example, Apex Silver Mines, a company based in the Cayman Islands, recently awarded a ten-year mine development contract valued at $360 million to Idaho-based Washington Group International for the development of its San Cristobal project in Bolivia.

Some of the money changes hands in cases where it shouldn't. Near the end of January 2005, about 50 multinational energy, mining, and construction companies signed a zero tolerance statement against corporate bribe paying at the World Economic Forum held in Davos, Switzerland. While US laws prohibit companies from making bribes, comparable laws do not exist in all the countries where mining firms operate. "It's an effort by the oil, mining, and gas industries to confront corruption in developing countries," stated Doug Hock, a spokesman for Newmont Mining Corporation, one of the participants in the accord. Newmont has been investigated over accusations of bribery in Peru, although no cause was found to press charges.

The mining industry must also contend with regulatory and environmental issues. When Christopher Herald discovered gold in a remote ridge of the Okanogan Highlands in Washington State, he attempted to create the state's first open-pit gold mine. The attempt was met with ten years of legal and permitting battles against Herald's Crown Resources Corporation. Opponents contended that the construction of an open-pit mine would have torn up part of Buckhorn Mountain, generated 90 million tons of waste rock, and created a pit lake that would require perpetual treatment. Crown Resource's efforts fell through in 2001 when its partner, Battle Mountain Gold, pulled out. Battle Mountain had already invested more than $60 million into the project.

Crown Resources has reworked its proposal and now intends to construct a smaller, underground mine with considerably less environmental impact. The new project has an interested buyer, Kinross Gold Corporation, and a proposed opening date in early 2006. The deal is far from certain, however. Crown is still filing environmental impact statements, and the anticipated truck traffic generated by the mine remains a local issue.

The mining industry produces a wide range of products, from gold and precious metals to coal and the raw materials for steel and other metals. With the increasing industrial development of many nations, and economies in the developed world improving, demand for these products is likely to remain high. The industry remains challenged, however, by the rising costs of production, including increasing oil and employment expenses. Regulatory and environmental challenges can also be expected to continue to impact the industry.