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Rush to Gold:
Precious metal's 15 minutes
giving Denver's Newmont a boost

By Heather Draper
Rocky Mountain News (Denver)
Saturday, July 13, 2002
http://www.rockymountainnews.com/drmn/business/article/0,1299,DRMN_4_1
263025,00.html

Headlines about alleged corporate corruption
from Enron to Qwest, a falling U.S. dollar
overseas, and general uncertainty over
terrorism and fighting in the Middle East
have investors congregating in the sanctuary
of gold. Although gold prices historically
have been volatile with an inverse
relationship to the strength of the dollar,
some analysts say this gold bull run will
continue for some time because it's the only
safe place for investors to go.

"Gold is essentially the refuge of last
resort now," said Joe Duarte, a Dallas fund
manager and author of "Successful Energy
Sector Investing." "The negative of that is
that market history shows that a frantic rise
in gold stocks precedes a major decline in
the stock market."

Gold stocks are "extremely speculative,"
Duarte said, "so when people rush to gold
it's for one of two reasons: They are truly
scared, or they think things are so good
they'll invest in gold because it's the last
dog to rally. My indicators are telling me
that people are getting very scared."

Local gold expert Douglas Silver, president
of Denver Tech Center-based Balfour Holdings
Inc., was even more blunt in his assessment:
"If the world is going to hell in a
handbasket, people flock to gold."

Gold's luster returns

While rapidly rising gold prices and stocks
might be an indication of the anemic
condition of the U.S. stock market, they mean
good things for Newmont -- the world's
largest gold producer -- and the other gold-
related companies that call Denver home.

Gold companies have suffered through
historically low prices in the past few years
(gold averaged about $270 an ounce in 2001),
but that has led them to become more
efficient, said Mary Korpi, spokeswoman for
Newmont at its Nevada mining operations.

"Cash flow was not a major emphasis (at
Newmont) 10 years ago," Korpi said. "Now
there is a huge awareness by staff and
management. Employees are always looking for
ways to save money."

Dan Gralian, who runs Newmont's 400,000-acre
cattle ranch near the Elko gold mine, said
"it got really depressing around here for a
while when gold prices fell." But he thinks
the low prices were good for Newmont in the
long run.

"When I first came here (in 1992) and gold
was around $400 an ounce, you couldn't spend
money fast enough," Gralian said. "The low
prices (in the late 1990s) made them do
things more efficiently."

Newmont has cut its total cost per ounce in
Nevada to about $260 from $302 in 1996, when
gold prices were over $400 an ounce, said
spokesman Doug Hock.

That equates to higher gold prices becoming
the icing on the cake for companies like
Newmont.

"We call that leverage, and gold shares have
tremendous leverage to a rising gold price,"
Silver said. "Because they've had to be so
thrifty all these years -- and they continue
to be thrifty during rising gold prices, more
money goes to the bottom line."

Because higher gold prices provide mining
companies with increased cash flow, investors
are more willing to pay a higher price for
the company's gold reserves.

"Their costs are somewhat fixed at this
point, so when prices rise, shares rise in
high multiples to company earnings," Silver
said. "In other words, very little increase
in earnings results in a catapulting in share
prices."

Denver's golden roots

Although the state's "new economy" high-tech
and telecommunications companies have
received most of the limelight in the recent
years, Colorado's economy was first built on
mining.

Coloradans need look only as far as the
state's Capitol to be reminded of the state's
mining heritage -- about 200 ounces of
Colorado gold glitter atop the Capitol's
dome.

The state's history was forever changed in
1858, when William Greeneberry Russell
discovered gold in Cherry Creek, according to
research by Balfour Holdings.

Word of his discovery sparked a mass
migration of about 100,000 people to the area
in the next two years.

In 1858 and 1859 several other gold
discoveries followed in the mountains nearby
Denver. Each new discovery led to the need
for more services and supplies in Denver,
which helped the city's economy boom, the
Balfour research said.

Rich gold ore discoveries in Cripple Creek in
1891 were key to the development of Colorado
Springs and inspired others to keep exploring
in the Rockies.

Today Denver is home to about 50 mineral
companies and hundreds of consulting firms
and ancillary service industries, Silver
said.

The Denver Gold Group, a nonprofit group that
acts as a liaison between the mining industry
and financial sources, sponsors an annual
gold seminar that attracts the world's
leading gold producers and institutional
investors. The Colorado School of Mines was
formed in 1874 and remains one of the
foremost mining schools in the world.

"The city has earned the name 'Mining Capital
of the United States,'" Silver said. "So
rising gold prices definitely have been
fabulous for the local economy."

Invisible gold

The recent gold rally has likely saved some
gold companies from extinction because miners
can't withstand low prices for long periods.
Most gold is now found in "traces" in ore
deposits and not in small nuggets or flakes
floating down a river, so the cost to produce
"modern" gold -- called "invisible gold" in
the industry -- is high.

Newmont operates North America's most
productive gold district, called the Carlin
Trend, in northern Nevada. All that gold
falls in the invisible category and must go
through complex chemical processes before
being turned into 55-pound bars.

"Things are dramatically different than they
were in the 1960s," said Trent Tempel,
general manager of Newmont's Nevada
operations. "Fifteen years ago we were still
finding stuff at the sagebrush level. Now we
rely on 3-D geologic models to find ore
bodies -- it's almost as much magic as
science."

Even ores considered "high grade" contain
only about a third of an ounce of gold per
ton of mineral ore. Low-grade rock contains
only .02 to .05 ounces of gold per ton. As
the price of gold goes up, the lower grades
become more economical to process, Newmont's
Hock said.

Regardless, Newmont had to move a lot of rock
to produce 2.7 million ounces of gold in
Nevada last year.

It's also costly for Newmont to ensure that
its mines operate in an environmentally sound
manner, Hock said.

At the Carlin Trend, Newmont runs the lower-
grade ores through a cyanide heap-leach
process, which often raises red flags for
environmentalists.

In heap-leaching, the mined rock is crushed
and put on lined "leach pads," where a
diluted cyanide solution is poured on top of
the pile. The solution percolates down
through the crushed rock, chemically pulling
out the gold. The gold "slurry" is recovered
in a lined pond and eventually runs through a
series of leaching tanks, where the gold
adheres to the carbon in the tanks.

Tempel said none of the cyanide is allowed to
escape because Newmont operates under a zero
discharge policy, which also applies to the
other toxic byproducts of modern mining:
sulfur dioxide, carbon monoxide, and mercury.

Hock said current gold prices help Newmont
cope with the total cost of production,
including environmental mitigation,
reclamation, litigation, depreciation, and
mine closure costs.

A recent example of litigation costs has been
a series of lawsuits against Newmont for a
mercury spill in Peru in 2000. The company
spent at least $10 million on cleanup efforts
and could pay millions more if the plaintiffs
win their case, which alleges health and
environmental damages from the spill.

"If the price of gold is $250 and our total
cost to produce it is $260 an ounce,
obviously we have a problem," Hock said.

The question remains, however, whether the
latest gold rush will last.

"For gold, it's the toughest of all sectors
to predict where it will go," Duarte said.
"But rallies in gold stocks often precede
something dramatic happening -- like the
market crashing."

Balfour's Silver is convinced the market will
falter for at least the next few months, so
gold will continue to shine.

"Because we're getting multiple corporations
surfacing with accounting problems, I think
the government will crack down even more, so
we're going to see more of it," he said. "I
think we're just at the beginning of what
will take at least a year to resolve."