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Management Issues, Poor Allocation of Capital, , Confound Investors in Global Mining Sector

Gold mining companies get accused of many things, the latest being the poor allocation of capital by disgruntled investors who in many cases have seen their investments wiped out by corporate mismanagement, supported by compliant directors and officers. Is it any wonder that investors are abandoning the sector for more predictable (and profitable)  market segments?

In my experience at least, mining companies will just about invest anywhere, country risk be damned. Oil companies are much the same although the potential for financial gratification in their business generally involves a much shorter timeframe compared to mining which from discovery to development – at least in the U.S. and Canada – usually takes a decade or more.

Not so in the rest of the Americas and perhaps even less so on the African continent where rampant corruption, grinding poverty and tribal/religious issues are usually just below the surface and often serve to expedite development unencumbered by strict regulatory compliance.

Throughout Africa, Tanzania being among the worst, illegal miners regularly overrun mining and exploration projects, AngloGold Ashanti’s Geita  mine in Tanzania being a notable example last year where an invasion of hundreds of illegal miners was a daily occurrence at one point.  Several miners were killed and one reportedly died recently in the region following a confrontation with security personnel. Mine operators and explorers in the region are said to be paying hundreds of thousands annually for security protection.

But more on the senior companies in the gold sector who set the tone for the industry. Clearly one of the most alarming trends we’ve seen in the past decade is the rampant disregard for controlling production costs which have generally trended upward at a faster pace than commodity prices, gold being a notable example.

Cash costs have risen dramatically due to mining lower grades, increased costs for energy, consumables, and labor. Even more disconcerting perhaps is the apparent deliberate masking of all-in production costs by listed companies which also includes estimates for projects at feasibility and pre-feasibility stages. Thank heaven this practice appears to be coming to an end with most industry players voluntarily adopting the concept of reporting All In Sustaining Costs (AISC) which in fact still needs to be standardized across the industry.

Capex costs are another story! When you look at the board-approved go-ahead decisions,  huge cost overruns and subsequent write-downs for projects like Pascua Lama on the Argentine/Chile border and the Tasiast gold mine in West Africa (a $7 billion open market investment by its owner to begin with) one could easily be reminded of the Abbott and Costello comedy routine “Who’s on First.”  (For officiados of the noble art of irony – and in obvious reference to the corporate issues raised above – Bud Abbott noted that the former was taken from an older routine called “Who’s The Boss?” which appeared in an episode of the radio comedy program “It Pays to Be Ignorant” from the 1940s).

In the interest of fairness, there’s plenty of blame to go around for the current state of disinterest in gold mining equities including the junior exploration sector. One of the main culprits, in my opinion, is the portrayal of Preliminary Economic Assessments (PEAs) as being representative of economic viability, along with actual development and production costs. These studies can include inferred resources, which have a very low confidence level, and in one situation I’m aware of included a property that was not even owned by the company but in fact was the subject of a joint venture negotiation.  Go figure! Regulators often fail to recognize the credence investors  give to globally recognized standards that in fact do little to protect them.

In general, investors in mining stocks fail to educate themselves about the nature of their investments. They rely on management for so-called factual information which is often biased and geared towards being market supportive. Industry professionals, most of whom are governed by professional associations, tend to be more credible although in recent years we’ve seen at least one jailed for falsifying assay results and making bogus statements which saw his company loose hundreds of millions off its market cap.

Unfortunately, many companies are managed by prima donnas with no background in the minerals industry who have no concept what it takes to bring a gold mine into economically viable commercial production. Mind you there are many seasoned non-industry executives who are smart enough to hire experienced professionals to do this but they are often few and far between. The fact is there have been many accountants that have run very successful mining companies because they hire the right people and keep a close eye on the bottom line.

As a 45 veteran of the minerals industry, I am constantly amazed that even today we still see individuals and companies claiming to have proprietary assay and exploration methods that can analyze and detect gold beyond the capacity of proven methods. A lot more of these people should be subject to regulatory and civil sanctions in my opinion, a statement that obviously applies to markets not just in Canada but abroad. If the industry is to thrive once again, investors need to have confidence in the companies they invest in.

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