Leading gold miners see ore boost near mines

Thu May 20, 2010 11:32am EDT

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* Gold companies eyeing polymetalic deposits - Newmont

By Eduardo Garcia

LIMA, May 20 (Reuters) - Leading gold miners say they see "brownfield" exploration as a low-risk, cost-effective way to boost output in the medium term, as global economic uncertainty could make prices for the yellow metal wobble.

And, if prices stay where they are now, near all-time highs, adding onto existing mines would be the quickest way to lift production and profits.

Executives from Barrick (ABX.TO), Gold Fields (GFI.N) and Newmont (NEM.N) told a biannual gold mining summit in Lima this week that exploration near existing mines -- areas know as brownfields -- is key in their plans to increase ore body.

"The best and the lowest risk expansion opportunities are brownfields ... That's why we're spending a third of our exploration budget on brownfields opportunities," Gold Fields Chief Executive Nicholas Holland told Reuters in an interview.

Other major gold miners told the meeting in Lima that near-mine exploration is also a centerpiece of their expansion programs in the medium term because developing a new mine from scratch typically takes more than eight years.

"An ounce found within 5 or 10 km (3 to 6 miles) from an existing mine is worth a lot more than an ounce that is remote," said Barrick Executive Vice President Peter Kinver.

About half of Barrick's exploration budget this year is slotted for near-mine areas, Kinver said.

ECONOMIC UNCERTAINTY

Holding up on riskier projects in "greenfield" areas, where there is no mining activity, seems reasonable as many investors do not yet see clear signs that the global economy is rebounding from the downturn of the past two years.

"Often you have to establish basic infrastructure before you even get the mine going. You have to be sure of the economics before you press the bottom on those decisions," Holland said.

And, traditionally, gold prices have moved in sync with oil prices, which would likely mean higher production costs for gold miners if prices for the yellow metal rise.

"It is going to be pretty choppy. Prices never go up indefinitely, I think there is some upside risk to gold prices," said Bart Melek, an analyst with the BMO financial group.

"Our official forecast is $1,200 an ounce for 2011 ... We're concerned about potential monetization, high debt levels in Europe and North America," he added.

Fears of contagion from Greece's debt crisis have driven gold to a record as investors ditched the euro and bought the metal as a safe haven from volatile currencies and stocks.

But gold prices dropped more than 2 percent on Wednesday, despite a tumbling euro, stirring concerns the precious metal may be ripe for a correction. [ID:nLDE64I0SL]

COST SAVING, SYNERGIES

Another reason why gold miners are focusing on boosting production at existing mines, or exploring near them, is because developing mines in the same area is cost effective.

"We've been quite lucky to find stuff near mines (in Peru), because the infrastructure is already there," said Kinver.

Buenaventura (BUEv.LM) (BVN.N), Peru's largest precious metals miner, and Newmont, its partner, are considering a tie-up with Chinese companies to jointly develop two major gold deposits in Peru that are near each other. [ID:nN06137920]

Exploring for gold near the areas where other companies have found world-class deposits is also seen as a safer bet.

Newmont Executive Vice President Guy Lansdown said that, as of recently, gold miners are developing polymetalic deposits because pure-gold deposits are hard to come by.

"Discoveries have reduced significantly over the last five years ... It's just a mature industry. It's hard to replace them (existing deposits). We're finding that we have to go into very difficult environments," Lansdown said.

Also, gold miners cut their exploration budgets when gold prices were low, which means that there are not many new projects scheduled to come on stream in the short term.

"We're seeing some of the lead-lag effects of the deferred and reduced exploration span in the past and, unfortunately, it is going to take some time for us to catch up," said Holland.

"I think exploration will pick up again, but it is going to take some years for us to see the impact of that, and gold companies are going to have to start looking into new frontiers to find new gold deposits," he said. (Additional reporting by Teresa Cespedes and Patricia Velez; Editing by Walter Bagley)

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