Bullion rise, reserves in focus as gold miners meet

DENVER (Reuters) - The rally in gold bullion prices to a 28-year peak last week has driven gold mining stocks to new highs, in spite of the producers' struggle to control costs and to replace reserves.

Global gold mining executives will no doubt have to tackle the contrasting themes when they present their corporate pictures at the industry's annual meeting in Denver.

At the 18th Denver Gold Forum, which started on Sunday and runs through Wednesday, 72 companies will make their cases to mining analysts on the sell-side and 253 buy-side fund managers, said the Denver Gold Group, the organizer.

The presenters include industry leaders Barrick Gold Corp (ABX.TO), Newmont Mining Corp (NEM.N) and AngloGold Ashanti Ltd (ANGJ.J). About 650 people are expected to attend the trade show, up from 592 last year.

"I think one theme that will be cast most starkly in contrast will be the difference between gold the asset, which looks better and better, and gold mining the business, which looks tougher and tougher all the time," said John Hill, director, metals research at Citigroup in San Francisco.

To be sure, gold mining companies are benefiting from bullion's rise. AMEX Gold Miners index .GDM, a gauge of gold producers' performance, rallied to a 16-month high on Friday, after skyrocketing 40 percent since the index hit a bottom in mid-August.

During the same period, gold XAU= has gained nearly $100 to Friday's peak of $739 an ounce, from a low of $641.10.

"The rising gold price is going to make their cash flow go up, and is also going to make their marginal reserves more valuable," said Frank Holmes, chief executive of U.S. Global Investors Inc (GROW.O) in San Antonio, which has nearly $5 billion in assets under management.

Joseph Foster, portfolio manager of the $550-million Van Eck International Investors Gold Fund in New York said that any rise in gold prices would drop right into the bottom lines of the companies.

"The other big thing (in Denver) will be the measures that the companies are taking to control costs, because these gold miners have been under severe cost pressure over the last several years," Foster said.

COSTS, RESERVES CHALLENGE MINERS

A boom in commodities has bid up costs of mining operations. The cost of labor, engineering equipment as well as materials such as steel and copper used to build mines has risen sharply in the last few years.

Yet, gold companies are also facing the challenge of replacing existing reserves. The low gold price in the 1990s had forced many miners to cut exploration expenses, resulting in falling production now, experts said.

"I would say that the pace of discovery has been quite disappointing. There's been several big discoveries. But in general, we are still suffering with 10 years of under-investment and under-exploration," Citigroup's Hill said.

Foster also said that it was more difficult to get mining permits and to bring new discoveries into production these days.

$850 GOLD NEXT YEAR?

Meanwhile, rising bullion price also prompted major gold producers Newmont and Australia's Newcrest Mining (NCM.AX) to buy back their money-losing gold hedges. The only significant hedges remaining belonged to AngloGold Ashanti and Barrick, analysts said.

"Dehedging has been a big part of the positive backdrop for gold over the last two to three years. Buying back hedges drains physical gold from the market and it's helpful for the price," Hill said.

On the other hand, gold mining executives have much to celebrate after the Bank of Spain said last week that it did not plan to sell anymore gold this year. Central-bank gold sales have taken a toll out of bullion investor sentiment this year.

Indeed, Hill says that a retest of gold's all-time high of $850 set in 1980 is extremely likely. Van Eck's Foster says investors could see $850 gold in the next six months.

"Gold has really not had much impetus from inflation for a long time. But since the Fed meeting, the inflation factor that historically has supported gold has returned after a long absence," said Bill O'Neill, partner of LOGIC Advisors in Upper Saddle River, New Jersey.