Canadian Mining Journal

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DOING SOME DIGGING The Good, the Bad and the Gold Price

"Yippee!" people say when the price of gold rises. "Let's go south," they say when the Canadian dollar rises. But w...


“Yippee!” people say when the price of gold rises. “Let’s go south,” they say when the Canadian dollar rises. But where is the advantage for Canada’s gold producers?<br>
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The rising gold price of the last year is cause to celebrate. Just a year ago, on Jan. 14, 2003, the price was US$353.10 per ounce. This month it is trading between US$420 and US$425, shining a positive light on many gold projects. The Hope Bay project of Miramar Mining should be producing in late 2005. Cumberland Resources hopes to put the Meadowbank deposit into production by late 2006. Production from Wolfden Resources’ High Lake and Ulu polymetallic deposits is tentatively planned for late 2007. <br>
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In 2003 as the gold price rose, the Canadian dollar grew stronger compared with the U.S. dollar. On Jan. 14, 2003, the Canadian dollar was worth 65 cents US; today it is up to 79 cents US. The rate is advantageous to vacationers, but it hides a sobering fact for this country’s gold producers. Stated in U.S. dollars the price of gold rose 20% during the past year. Stated in Canadian dollars, the price actually fell slightly to Cdn$540.64 from Cdn$543.67.<br>
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For a company producing gold in Canada and paying for goods, services and labour in Canadian dollars, there is no advantage in a rising gold price if our dollar is strengthening at the same time. Producers still have to cut costs, improve productivity and pay taxes. They are running faster to stay in the same place.<br>
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Canadian gold companies that operate offshore may find the rising gold price more to their liking if they conduct their financial transactions in U.S. dollars. When the price of a product goes up 20% relative to the currency used in an annual report, that is a remarkable windfall. The windfall shrinks if the local currencythe one with which the producer pays its taxes, workers and suppliersrises against the U.S. dollar as the Canadian dollar has done.<br>
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Needless to say, the foregoing generalizations are just thatgeneral. Each company has investments and expenditures other than those allocated for production activities. They may be spending on major grassroots exploration, or have to write down assets, or sell investments for cash. But a quick check of Kinross Gold, Placer Dome, Agnico-Eagle, Barrick Gold, and Cambior (all of which report financial results in U.S. dollars) reveals they had higher revenues for both the three months ending Sept. 30, 2003, and for the first nine months of that year than they did a year earlier. Conversely, Miramar Mining and Richmont Mines had less revenue for the same periods in 2003 than they did in 2002; both companies report financial results in Canadian dollars.<br>
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Certainly the profitability of gold producers depends on more than their choice of currency. It is a complex equation of metal price, production costs, investments, and responsible management. Much to their credit, the companies I mentioned all reported positive revenue results; there was not a loss among them during the first part of last year. But in saying all this, I want to remind everyone that a rising gold price does not automatically translate into huge profits for producers.