A TALE OF TWO MAJORS
NYSE symbol NEM.
For the uninitiated, Newmont Mining, headquartered
in Denver, Co, is the largest gold mining company in the world.
Newmont controls sixty million acres, land roughly the size of
the United Kingdom, and is one of the best run and lowest cost
major producers in the industry (so is Placer Dome, incidentally).
It's President, Pierre Lassonde, and Chairman, Seymour Schulich,
became industry legends for their remarkable
performance running Franco-Nevada, which later merged with
Newmont. A number of industry insiders who have known Mr. Lassonde
have told me that he is a "professional's professional,"
both a very shrewd deal-maker and a very ethical individual, which
can be a rare combination. In recent months Newmont's stock has
traded at roughly twice its net asset value per share, and a liquidation
value (suggested by fund manager Bill Fleckenstein's analysis)
that anticipates roughly a $50 rise in the gold price from where
gold has been recently fluctuating in the low to mid-$400's. Newmont
has become a bellwether of the precious metals sector reminiscent
of Intel for semiconductors in the 1990's. The firm also played
a leadership role to help eliminate the aggressive hedging among
major gold mining companies that I discuss in Part
One that drove the price of gold down to ruinous prices for
half the mining industry in the late 1990's.
As I also mentioned at the beginning of Part
One, no one needs to lecture Newmont about finding Carlin-type
deposits. It was Newmont mining geologist John
Livermore who found the original Carlin deposit after reading
an article and hearing a lecture by Dr. Ralph Roberts. However,
there was so little exploration in the late 1990's on account
of depressed gold prices that it created roughly a five year gap
in the exploration pipeline across the gold mining industry. Because
of the long lead-lag times required to find resources and put
them into production, gold mining industry analysts predict a
steady decline in gold production for the next five years even
if gold prices zoom. I go into this and other factors in more
detail in my article "Back
of the Envelope Analysis for $1,000 Gold in Five Years."
The period of industry consolidation that accompanied
severely depressed gold prices in the late 1990's -the same period
in which the exploration pipeline shriveled up --all of this had
the paradoxical effect of increasing the need by majors to find
ever more reserves to maintain their higher post-consolidation
Generally, major gold mining companies are not as
good at exploration as the juniors, yet they are not replacing
their reserves at the same multi-million ounce rate per year that
they are producing them. This means they will likely to feel even
more pressure to engage in joint ventures or acquire juniors in
the years ahead, putting even more upward pressure on junior mining
company stock prices.
Size of Cortez land position: This
is difficult to calculate, particularly since many of the former
Santa Fe railroad "checkerboard" parcels in the northern
area are unmarked on the property map in Part
Five. Also, the northern and southern borders of the Cortez
Trend are not precisely defined. My very intuitive guess is that
Newmont is probably the largest landholder in the area, except
that the company controls the tail ends of the Cortez Trend play.
Newmont does not appear to have proven deposits on the Cortez
Fault system itself, whereas the Cortez Joint Venture area (60%
Placer Dome, 40% Kennecott) holds the "center" and has
proven mega deposits within the Cortez Joint Venture area on the
fault system. Placer Dome has actively explored the Cortez Trend
area much longer than Newmont, and has probably has a first mover
advantage in staking the most prospective parcels.
Cortez Trend Properties:
1) Newmont has huge land holdings on former Santa Fe railroad
land that encompass most of the northern end of the Cortez Trend.
The lands encompass the Mule Canyon Mine, the Lone Tree Mine,
and the Phoenix Deposit. Please refer to the top section of the
Battle Mountain - Eureka Trend map provided by Mineral Information
Maps contained in Part
Five. Victoria Resources, White Knight, and Klondex occupy
the yellow, red, and orange colored checkerboard square properties.
Newmont has most of the unmarked light green checkerboard squares
Newmont is operationally active in the area. According
to Newmont: "In 2001, Newmont acquired Battle Mountain Gold
Company, giving Newmont ownership of the Phoenix property, south
of Lone Tree, where historic mining has left a halo of lower-grade
gold and copper reserves... Construction of a new 37,000 ton-per-day
mill and other facilities is scheduled to begin in early 2005,
with production beginning in 2006. Nevada management is working
to ensure a smooth transition between the scheduled cessation
of mining at Lone Tree and the startup at Phoenix."
A Newmont spokesperson told me that recent drilling
has now proven up 6.2 million ounces of gold and 420 million ounces
of copper at the Phoenix Mine. However, I was informed by another
source that from a technical geological viewpoint, Phoenix does
not involve a sedimentary Carlin-type deposit, but rather involves
the product of a granitic intrusive.
Newmont's holdings are marked in
yellow. They lie at the very northern end of the Cortez Trend.
2) Victoria Resources' Mill Canyon and
Hilltop-Slaven properties: Newmont has 51% back end rights,
30 June 2004 by Victoria Resources. Newmont also holds 100% of
the alternative checkerboard properties at Victoria Resource's
Hilltop-Slaven properties. The same holds for Victoria's Preble-Pinson
properties which are north of the Cortez Trend and Interstate
80 but still within the Battle Mountain-Eureka Trend.
3) Southern Cortez Trend. Newmont also has two
substantial land holdings towards the southern end of the Cortez
Trend, as noted in the Mineral Information Map provided at the
beginning of Part
4) Miranda' Red Canyon project. Miranda's Oct
19, 2004 news
release stated: "Newmont can earn a 60% interest in the
Red Canyon property by spending $2.5 million in exploration expenditures."
Active mines in Cortez area:
Currently Newmont is not mining of Carlin-type deposits in the
Cortez Trend area. The Phoenix mine, with 6.2 million proven and
probable gold reserves, will start up in eighteen months at about
the same time that the Lone Tree mine retires. (Lone Tree is located
NW of the town of Battle Mountain). Geologically it is a skarn
and granitic intrusive. Moving further east, Newmont's Mule Canyon
Mine is an area with small pits, but there is no mining there
now. Mule Canyon is a volcanic creature of the Northern Nevada
Rift dated about 16 million years ago and is not a Carlin-style
deposit dated 38 million years ago either.
Amount of proven reserves in the broader Cortez area.
Newmont has 6.2 million ounces at the Phoenix mine.
True, Phoenix does not appear to involve a Carlin-style deposit,
nor does it appear to be on the main Cortez fault system; however,
it is south of the city of Battle Mountain and I-80. It may be
too early to rule out the possibility that it involves a cross
rift structure that is related to or has interacted with the main
Cortez fault system.
Other projects outside of the broader Cortez area:
Newmont is the key player on the Carlin Trend and has projects
around the world.
Exposure to Cortez The Phoenix Mine reserves
comprise about 7% of Newmont's 2003 reserves.
Total gold reserves in company. 91.3 million
ounces @$325 proven and probable (2003 data). 2004 data will come
out in February 2005.
Total production 7.38 million ounces in 2003
at $203 cash cost per ounce.
Total Company revenues: $475 million in 2003.
Fully diluted shares: 433.4 million shares
Working capital: In its June
30, 2004 quarterly report, Newmont had $1.67 billion in cash,
cash-equivalents, marketable securities, and other short term
Outside ownership/largest shareholders. Newmont
is widely held by the public and institutional investors.
Management/Strategy: Newmont remains focused on Nevada
and also faces a problem with rising costs, as noted in the Aug
3, 2004 Raymond James research report on Victoria Resources by
analysts Eric Zaunscherb and Bart Jaworkski:
Newmont is the largest player in northern Nevada,
operating 12 open pit mines and five underground mines. As of
February 2004, Newmont's reserves in Nevada totaled 33.7 million
equity ounces, or 37% of its total 91.3 million equity ounces
in reserves. In 2004, Newmont expects its equity gold sales
from Nevada operations to total 2.60 million ounces of gold
(versus 2.49 million ounces in 2003), or approximately 36% of
its total production. This makes the Nevada operations Newmont's
second largest gold producing area after Yanacocha, Peru, which
produced 2.85 million ounces in 2003.
A key issue to highlight, however, is that despite
Newmont's increases in production, costs are going up. In 2004,
Newmont's total cash costs in Nevada are expected to be $250
per ounce, compared to $235 per ounce in 2003, $225 per ounce
in 2002 and $222 per ounce in 2001. Increasing cash costs are
likely due to increasing amounts of refractory ore and underground
mining. Refractory ore accounted for 71% of Newmont's Nevada
gold sales in 2003, compared with 66% in 2002, 65% in 2001 and
35% in 1997. Newmont states that over the next several years,
the percentage of production from refractory treatment facilities
is expected to increase (refractory ores require more expensive
processing methods than those required for oxide ore). Newmont's
underground mining accounted for 36% of Nevada sales in 2002
compared to 16% in 1997. One should note that Placer Dome's
Cortez Hills discovery is predominantly oxidized and significantly
Oxidized ores, as the term implies, are typically
located near the surface and have been exposed to various forms
of aeration and other forms of "weathering," whereas
refractory ores are typically found at deeper levels, and have
higher sulfide levels (and correspondingly lower oxide levels)
that make them more expensive to process. However, a saving grace
is that as one goes deeper, the grade (concentration of gold in
the ore) tends to increase, so there is an economic trade-off
here between the higher gold grade and the increased processing
expense from the higher sulfur grade.
The cheapest process involves the heap leach method,
in which mining companies dump huge mounds of ore on giant pads
and slowly drip a cyanide solution through the ore to leach out
the gold. To get the gold out of higher sulfide ores, mining companies
have to put the ore through more exotic and expensive treatment
processes, that typically involve giant roasters and big pressure-oxidation
vats. More recently certain companies have pioneered an environmentally
friendly approach of using tanks that have sulfide-eating bacteria
(please note my discussion of BacTech in Part
Four). Newmont has pioneered a hybridized process where it
uses bacteria to munch on sulfidized ore in open air heap mounds.
Rick Redfern, head geologist for Senator Minerals,
told me that the Elko, NV area alone has over $3 billion dollars
of processing infrastructure run by majors such as Newmont and
Barrick. Some roasters and autoclaves cost $200 - $300 million
apiece. Obviously with so much processing capacity on hand, if
Newmont wants to avoid laying off workers and closing down plants,
or avoid disappointing shareholders with dramatically declining
production curves, Newmont must do one or more of the following::
a) learn how to dig deeper cheaper b) make its lean and mean processing
capacity even leaner and meaner to profitably process lower grades
and c) find more gold --a lot more gold-- in its northern
NYSE symbol PDG.
1) Cortez Joint Venture land package.
Approximately 400,000 acres or 625 square miles. Placer Dome has
the largest land position in the middle of the Cortez Trend in
an assemblage of properties called the Cortez Joint Venture (CJV).
Placer Dome has a 60% interest in the CJV, and Kennecott, a subsidiary
of Rio Tinto (one of the world's largest mining companies), has
40%. On some contiguous properties, the CJV is partnered with
Coral Gold and Idaho Mining Corporation. Placer Dome is the lead
explorationist and operator of these properties.
The enormous mining infrastructure and reserves
on the CJV properties did not appear over night. The old Cortez
Mine located a few kilometers from the Cortez Hills discovery
area operated as a modest open pit operation from 1969 until it
was retired in the early 1990's. The adjacent mill continued at
2,000 tonnes per day, processing ore for Horse Canyon, Gap, Gold
Acres, and later Pipeline (its last two years) until it shut down
in October 1999.
In March 1991, Placer Dome discovered the Pipeline
ore body about 500
to 600 feet below the surface, followed by the South Pipeline
discovery in November 1991. The Crescent Pit, a shallow portion
of the South Pipeline deposit, began excavation in 1994. From
1996-97 Placer Dome built and put into operation a new processing
plant. Placer Dome made its Cortez Pediment Deposit discovery
in 1998, followed by its South Pipeline Extension Deposit Extension
discovery in 2000. It made its major Cortez Hills discovery in
April 2003. Currently Placer Dome operates three mines in the
Cortez Joint Venture area, which consist of the Gold Acres, Pipeline,
and Pipeline South Mines. The last two mines are almost continuous,
and are hence referred to as the "Pipeline Complex.".
The other mines depicted in the Cortez Joint Venture Part
Five map are "historical" (inactive). They include
the Hilltop Mine, Horse Canyon Mine, Toiyabe Mine, and aforementioned
Cortez Mine. Placer Dome has already mined 8.3
million ounces out of the Cortez Joint Venture area from the
time period between 1991 and June 2004..
The following resource and reserve data for the
Cortez Joint Venture area were taken from page 17.46 of the September
2004 Placer Dome Technical
|| Pipeline .
||Total Proven & Probable
||Cortez NW Deep
||Total Measured & Indicated
The above figures do not
include the ET Blue discovery, nor do they include Placer Dome's
discovery described in Part
One involving 500 feet at .7 ounce or 410 feet at over an
list of joint venture partners and ownership positions:
2) Bravo Venture Group's Three Bar Prospect
(3.86 sq miles), South Lone Mountain (2.99
sq. miles), and South Gold Bar property
(2.02 sq. miles) In regard to the latter, according
to the Oct 21, 2004 Bravo Venture Press
Release, "[Placer Dome can elect] to enter into a joint
venture agreement on such project to earn a 51 percent interest
upon total expenditure of $1.0 million.
3) Coral Gold's Robertson-Excluded property
(2.82 sq. miles). Placer Dome/Kennecott has 61%, Coral Gold has
the other 39%.
4) Miranda's Red Hill property. Miranda's Oct
28, 2004 news
release: "[Placer Dome] PDUS can earn a 60% interest
in the property by spending $2.0 million in exploration expenditures
over four years."
5). Nevada Pacific's Keystone property
. Placer Dome has the right to earn a 60% interest in the Keystone
project by spending $5,000,000 on exploration over a five-year
period. BMX property. 20 sq miles, Placer Dome
has right to earn in 60% with $4 million.
6 ) White Knight's Indian Ranch (75% owned by
White Knight) 17 sq. miles. "Placer Dome U.S. Inc. has the
right to earn a 60% interest for US $2.0 million in expenditures
over 4 years and may earn an additional 15% by financing a feasibility
7) U.S. Gold Corp's share of Tonkin Springs Property.
Placer Dome is a large
shareholder of US Gold, which owns 45% of Tonkin Springs.
BacTech owns the other 55%.
Mining and Exploration Concept of Operations
in Cortez Joint Venture Area:
Placer Dome currently runs a high volume, highly efficient, capital
intensive mining operation. The Pipeline Complex has helped Placer
Dome become one of the world's lowest
cost gold producers.
to Placer Dome. "During 2003, Cortez [Joint Venture area]
produced 1,065,402 ounces of gold (61% mill, 31% heap leach and
8% carbonaceous ore sale). Placer Dome’s share of production
ounces at an average cash and total cost of $135 and $172 per
ounce, respectively...Cortez's updated forecast for 2004 calls
for an increase in Placer Dome's share of production to 630,000
ounces...Its cash and total costs per ounce forecast remains at
$160 and $200, respectively...It won the Mining Operation of the
Year award at the Mining Journal's Outstanding Achievement Awards..."
"Capital expenditures of approximately $91
million (Placer Dome’s share $55 million) are planned in
2004. The capital investment includes $47 million for mobile mining
equipment and $28 million for tailings and heap leach construction...The
net book value of Placer Dome’s share of property plant
and equipment and deferred stripping is $72 million at December
As mentioned in my discussion of Newmont Mining
above, generally the pattern in the Carlin and Cortez Trend areas
is that one finds "spotty" gold deposits down to about
the first 1,000 to 1,500 feet of depth that are "oxidized"
in their molecular bonding and hence lend themselves to milling
processes. Going deeper, the gold often gets denser, but it tends
to become bound up in sulfide's, meaning that instead of milling,
it requires more expensive processes that include roasting, pressure
oxidation, and bioleaching to get the gold out of the ore.
Placer Dome is about a year and a half away from
mining out its shallower oxide ores at its Pipeline Complex, and
hopes to commence open pit operations at its Cortez Hills deposit
within that time so that it can keep feeding its mills the shallow
oxide ores. Page 19-1 of Placer Dome's Sept 2004 Technical
Report describes the following mining development projects:
a) Pipeline pit, containing the Pipeline and South Pipeline ore
bodies b) Gap pit c) Pediment pit, containing the Pediment ore
body and d) Cortez Hills pit, containing the Cortez Hills ore
Other projects outside of Cortez: Placer Dome
operates elsewhere in Nevada and in a total of seventeen mines
in seven countries.
Exposure to Cortez: Placer Dome's 60% share comes
to 9 million ounces of the Cortez JV 15 million proven and probable
total, amounting to 15% of Placer Domes total 2003 reserves.
Total gold reserves in company. 60.55 million
oz @ $325 proven and probable for 2003
Total production In 2003: 3.861 million oz at
$218 cash cost, plus 425 mil lbs Cu at .52 cash (source: Gold
Total Company revenues: In 2003 revenues were
$1.763 billion, net earnings $229 million (double the previous
Fully diluted shares: 432 million (Sept 2004
Working capital: On September
30, 2004, consolidated cash and short-term investments, not
including restricted cash of $90 million, amounted to $655 million
Outside ownership/largest shareholders. Widely
held. No one has over 10%.
2004 statement: regarding the corporate "grand strategy:"
a) Establish large land positions in major gold belts 1) Extensive
presence in Nevada, Eastern Canada, and Western Australia...b)
Explore aggressively near existing mine sites, 1) $75 million
exploration investment in 2004, 2) Two-thirds of exploration budget
invested at existing mine sites, c) Invest in high-return projects..."
The Aug 3, 2004 Raymond James research report
on Victoria Resources notes that Placer Dome has a very similar
strategic problem as Newmont in terms of replacing the high rate
of production of reserve ounces. It states, "Based on Placer
Dome's 2004 forecasts, we estimate the company's total cash costs
in Nevada will increase approximately 18% on decreasing production.
Increasing average costs of production in the Carlin area are
important from an investment perspective because they underline
the critical importance and strategic worth of new discoveries
in the region."
Cortez Exploration Strategy:
Depleting the shallower oxidized gold-bearing zones does not necessarily
mean that the Pipeline Complex area is going to run out of gold.
Please note on the White Knight Fault Map near the beginning of
Five, the Cortez Fault seems to displace and pivot in the
Cortez Joint Venture area. Both the Pipeline Complex and Cortez
Hills deposit may be sitting on the pivot points at different
ends of the Cortez Fault system. This is significant for at least
two reasons. The sides of the fault system seem to show controlling
structures running in parallel that hold gold deposits. Secondly,
the fault system itself may have lots of gold deposits deep inside
it. The Cortez Fault system probably goes down over 20 kilometers
through the earth's crust to magma, which in Nevada happens to
be half as thick as the crust found most everywhere else in North
America. In Part
Five I address the issue whether the Cortez Fault system may
in fact surpass the Carlin Trend.
In the Cortez Hills for sure, and to a lesser
extent at the Pipeline Complex, geologists see the 38 million
year old dikes with Carlin-style gold deposits that are a common
characteristic on the Carlin Trend. The gold-bearing zone in the
Cortez Hills area seems to be about 200 meters wide. Placer Dome
has drilled down 2,500 feet without finding a bottom yet. The
depth of oxidized gold is about 1,500 feet. Beyond that, one finds
A difference between Cortez Hills deposit and
the Meikle Mine on the Carlin Trend as a possible comparable is
that the Meikle Mine has more sulfides at shallower depths and
an average grade of .8 ounces per tonne, whereas the Cortez Hills
weigh in around .4 ounces per ton and have more oxidized gold
at shallow depths. As explained near the beginning of Part
Five, the major gold deposits in Carlin tend to be within
a couple of miles of one of the north-south faults that define
the trend (Post-Genesis, Leeville, and Good Hope faults). They
also tend to be close to a cross fault. There is nothing yet to
contradict this basic pattern in the Cortez Trend area.
The next big question is where does the Cortez Fault system lead
to running south from Cortez Hills, and north from the Pipeline
Complex? The Cortez Fault system does not reveal itself on the
surface like the San Andreas Fault in California, but rather it
has been completely covered over by recent geological activity.
White Knight has been more explicit than most companies about
making public its theories regarding the location of the Cortez
Fault system and its methods for finding it.
Placer Dome plans to more than double its exploration
expenditures in the Cortez Joint Venture area in 2005 compared
to 2004, which amounted to $6 million. A spokesperson for Placer
Dome denied a rumor in a phone conversation with me that Placer
Dome is planning to drill 900,000 feet in the Cortez area in 2005.
He observed that rig capacity has grown too tight in Nevada to
do this amount of saturation drilling, and that furthermore it
would reflect an unrealistic 20 fold increase compared to 2004.
Looking south from Cortez Hills, there is a chance that the Cortez
Fault system pivots and shifts again around the southern Tonkin
Springs area, where it may be intersected by a SW-NE trending
Tonkin Summit Fault Zone. I talk about the importance of cross
faults and describe this phenomenon in greater depth in my "Northeast
School" section in Part
Five. White Knight has run gravity map studies in such a way
that it thinks the northern edge of a possible crisscrossing fault
in the Tonkin Summit Fault Zone might run from Nevada Pacific's
Keystone property, through the Tonkin Springs Mine area, and through
the southern part of White Knight's Indian Ranch property. Placer
Dome apparently sees something here as well. Placer has already
arranged JVs with Nevada Pacific and White Knight on their respective
properties in this area.
Looking northward above the Pipleline Complex,
according to one source, Placer Dome has staked land just to the
north and south of White Knight's Slaven Canyon project. Unless
this is a "shot gun" or "fake-out" move by
Placer, this suggests that the company's explorationists can envision
the Cortez Fault system heading directly north through the Robertson-excluded
area, where Placer Dome has a joint venture with Coral Gold, through
the "checker board" properties held by Newmont and Victoria
Resources, and up through Slaven Canyon where White Knight wants
to start drilling several deep holes in April 2005.
Stay tuned as the plot thickens.
IV of series
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report is for research/informational purposes only, and should
not be construed as a recommendation of any security. Information
contained herein has been compiled from sources believed to
be reliable. There is however, no guarantee of its accuracy
Bill Fox is VP/Investment Strategist, America
First Trust. Bill welcomes phone calls and email responses
to this article. His most current contact
information is at his web site: www.amfir.com.