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Newmont Mining Corp (NEM), Barrick Gold Corporation (USA) (ABX): Gold Companies for Golden Returns

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According to the World Gold Council, 2011 was the golden period for gold as global demand for gold increased 0.4% to 4,067 tons at an estimated value of $205.5 billion, the highest level, exceeding $200 billion, since 1997. The increase was mainly due to the investment scenario in India, China, and Europe.

Gold demand was 1084.6 tons in the third quarter of 2012, down 11% from the historic high level of 2011. This was mainly due to a 2% dip in global demand for jewelry to 448.8 tons due to unfavorable economic conditions. With such volatility, gold miners are under pressure to decrease operating costs and improve margins.

Let’s discuss what strategies the three gold mining companies I am discussing here have chosen in this volatile market.

Growth in new mines

With new mines in Canada and Argentina, Goldcorp Inc. (USA) (NYSE:GG) is planning to boost its production by 50% and reduce its operating cost by 2017. Goldcorp’s capex is estimated to reach $2.8 billion by mid-2013, which is approximately $1 billion higher from 2012. A major portion of the capex, $775 million, has been allocated to Cerro Negro, Argentina.

The significance of the project for this region lies in the fact that the unemployment rate of Argentina is increasing. The project is expected to create 1,000 direct and indirect jobs, which will help decrease the increasing unemployment rate of 7.9% in the first quarter of 2013, compared to 7.1% in 2012.

In Cerro Negro, under the pre-exploration program, reserves increased 177%, from 2.1 million oz. estimated at the time of acquisition in December 2010 to 5.7 million oz. in the first quarter of 2013. The project is expected to start operations in early 2014, producing 314,000 oz. of gold. Gold production from the project is expected to be 550,000 ounces/year during the first five full years of operation at a cash cost of less than $200/oz. Based on current reserves, the annual production over 12 years of the life of the mine is expected to be 340,000 ounces/year at a cash cost of $290/oz.

Goldcorp Inc. (USA) (NYSE:GG)’s flagship mining project in Red Lake, Ontario, in Canada outperformed in the first quarter of 2013. It produced 146,000 oz. of gold at a cash cost of $476 per oz. against the estimated 116,000 oz. at $569 per oz. This growth was due to an increase in the number of mining heads in the last quarter of 2012. Goldcorp Inc. (USA) (NYSE:GG) has planned to spend $40 million in 2013 in Red Lake for increasing existing resources from its new mining area, the “NXT zone,” and to build a haulage drift.

The objective in the NXT zone is to grow existing gold resources and convert them to reserve. A new 5 km haulage drift, to be completed by the fourth quarter of 2013, will add to the production capacity of Red Lake. This drift is made to link Red Lake and the Cochenour complex. Upon completion of the drift, gold production from Cochenour is expected to be around 250,000 ounces per year, which will add to the 507,000 ounces per year of gold produced by Red Lake in 2012.

The Cochenour complex will start its commercial operation in the first half of 2015. Due to these developments, the company expects gold production to surpass the 507,000 oz. of 2012.

Better future with growth in gold and copper

Newmont Mining Corp (NYSE:NEM)

In the first quarter of 2013, the African market produced 625 – 675 kilo oz. of gold at a cash cost between $525/oz. – $575/oz. for Newmont Mining Corp (NYSE:NEM). To add to this burgeoning market, Newmont’s main development project, Akyem, in Ghana, is expected to start production in late 2013. Akyem is expected to produce 350 – 450 kilo ounces at a cash cost of $500/oz. – $650/oz. in the first five years of production.

The U.S. Geological Survey website reported in 2012 that Ghana was the tenth largest gold producer globally. Ghana’s mining sector is set to reach $730 million in 2017, from $669 million in 2012, due to its gold production. This gold-rich region will help in the long-term growth of Akyem. Due to this project, the company’s gold production is expected to increase from 70 kilo ounces by the end of 2013 to 200 kilo ounces in 2014.

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