Boom Times for B.C. Gold

Boom times are back for B.C.’s gold producers and indeed the whole precious metals sector. With it, too, some familiar faces and stories from the past.

In 2007 when Kinross Gold Corp. bought out Vancouver-based Bema Gold Corp., it looked like a takeover of a type only too familiar in B.C. “I guess we are a victim of our own success,” Bema founder and CEO Clive Johnson told the Financial Post’s Diane Frances at the time. But who was the victim?

Bema shareholders received a 38 per cent premium from Toronto-based Kinross in the $3.5-billion acquisition, and Bema officers and employees had options to cash in. The only losers appeared to be the city and province, which waved goodbye to yet another head office. And of course there was the province’s once-proud mining industry, which was a decade into a historic losing streak, during which not a single mine had opened.

Yet as is so often the case with both gold and mining, not everything was exactly as it appeared. Bema had solid reasons for entertaining Kinross’s unsolicited offer. The market had always discounted its rich Russian gold-and-silver project due to political uncertainties, while a 49 per cent-owned Chilean gold-and-copper property discovered by Bema would require some $2 billion to develop.

Nor was this quite the head office disaster it appeared to be. In the place of Bema rose B2Gold Corp., run by much the same executive team. “Kinross didn’t really have a place for us,” says Ian MacLean, vice-president of investor relations, “and we didn’t want to move to Toronto anyway.” But Kinross did take a stake in the company and entered into joint ventures that in effect left B2Gold taking care of much of the major’s exploration. Meanwhile, Johnson and company had a quarter century of experience under their belts and an ace or two up their sleeves. A little over two years later, B2Gold employs almost 30 in its head office on Burrard Street, about two-thirds of the old Bema component. Could the company also reach Bema’s production levels and market capitalization? “That’s the goal,” Johnson says. “And I don’t want it to take 25 years this time.”

With gold and other mineral prices high, big dreams are pervasive again in a mining industry that only a few years ago looked to be down for the count. The optimism was apparent during the third week of January when downtown Vancouver streets and hotel lobbies were crammed with throngs of people who weren’t there because they’d made the mistake of transposing January and February on their Olympics-year calendars, but rather had been drawn downtown by two mining conferences. One was the annual Mining Exploration Roundup, catering to the exploration industry; the second was the Cambridge House Vancouver Resources Investment Conference, geared to investors.

At the first, Jean Chrétien and Robert Friedland were among the speakers, and Lyn Anglin of Geoscience BC tantalized prospectors, geologists and the exploration companies they work for with the unveiling of technologically advanced surveys that indicate unexpected mineral resources across large swaths of southern B.C. At the latter, crowds spilled out the doors during presentations by some 30 speakers, while about 100 exploration and mining companies pitched potential investors on chunks of ground that were ripe to be sliced and diced.

Somewhere the ghost of Murray Pezim was smiling – but maybe the ghosts of the men and women who’d built B.C.’s mining industry weren’t unhappy either. Because, losing streak or not, while the province is responsible for only a tiny fraction of Canada’s mineral production – 12 per cent in the case of gold – 60 per cent of Canadian exploration companies are still based here, some 700 in all. Nor is B.C. the complete basket case it’s recently seemed to be when it comes to the actual digging of holes. In 2008 some $367 million was invested in exploration, and provincial mineral sales totalled $6.6 billion, up from $2.9 billion in 2001. Numbers for 2009 will be lower, but 2010 should mark a significant bounce back, and looking a few years down the road, the numbers could be in another sphere entirely. With a logjam of environmental, First Nations and economic obstacles apparently loosened, there are now about 30 mines and expansions seeking approvals.

[pagebreak]But realistically, for the Vancouver-based mining and exploration industry, the B.C. and even Canadian production totals are only a drop in the bucket, as a stroll around the Cambridge show quickly confirms. China’s largest silver producer is headquartered in Vancouver, as is the 50 per cent owner of a Mongolia project that claims the world’s largest copper-gold reserves. Significant chunks of Nevada and other mineral-producing states in the American southwest, not to mention Alaska, are locked up by Vancouver companies, and their presence is even stronger in Mexico and Central and South America.

Among Africa’s leading gold and platinum producers are companies from faraway B.C. Many of the globetrotters are juniors, but several of the B.C.-based mineral exploration companies (never mind coal, uranium, potash, gravel and the rest) have a market capitalization exceeding a billion dollars. Sometimes it’s a double-edged sword. Whenever and wherever an anti-mining activist is assassinated, a wildcat strike flares or an environmental disaster ensues, there’s a good chance a Vancouver-based company will show up in the news reports as a victim, perpetrator or found-in.

History and geology help explain why so many mining companies originated or settled here. The province was largely built on mining, and its complex geology continues to offer lots of promise. But given recent frustrations, why did they stay?

Mostly, contends Michael Gray, an explorations analyst with Genuity Capital Markets, it comes down to “clusters of excellence” and a favourable environment for fundraising. “Vancouver has the highest concentration of geologists in the world,” says Gray, who once served as president of the B.C. and Yukon Chamber of Mines, now known as the Association for Mineral Exploration B.C. As well, there are few other places with its quality of legal, engineering and accounting support. Meanwhile, he says, “it’s still a great place to raise money.” Beyond a roster of bankers, consultants, brokerages and promoters that specialize in mining, the city is home to investors familiar with mining’s risks and rewards.

All of this became especially important after the collapse of capital markets in 2008, adds Dave Zamida of BCgold.com, a broker and assessor of resource properties. “Lending to juniors has not really resumed,” he says. In Vancouver, however, many smaller companies were able to find money within the industry. B2Gold is a case in point. It acquired its two producing mines in Nicaragua by absorbing a Vancouver-based junior that couldn’t raise operating capital during the financial crisis. Fortuitously, B2Gold had just completed a successful $100-million IPO and had cash on hand.

As yet the effects of the gathering gold and metals boom are barely being felt beyond the few square blocks of downtown Vancouver where most head offices are clustered. Sales of gold jewelry and even raw gold are depressed worldwide due to the high prices, and locally there has been no run on panning equipment, laughs a man answering the phone at Western Gem and Mineral Supplies in Cloverdale.
The province’s placer mining industry has also failed to feel the love. Zamida says the industry sparked after 2005, with the introduction of online staking and the beginning of a run-up in gold prices, and he believes activity is currently recovering from subsequent lower prices and financing difficulties. But Jim Gibson of the Cariboo Mining Association sees little improvement in the downward trend, largely due to delays and difficulties in obtaining permits.

On the other hand, prospects seem almost uniformly bright on the hard-rock side, in part because gold shows signs of entering the same “peak” era as petroleum. In the years since worldwide oil discoveries fell below consumption in 1980, producers discovered new ways to wring residual oil from reserves once abandoned as uneconomic. Worldwide gold production appeared to reach its own peak in 2000, and, with prices appearing to stabilize above $1,000 an ounce and copper prices strong as well, various historic mines and regions around B.C. are now attracting renewed scrutiny and, in some cases, new investment.

Peak gold may also prevent prices from sliding too low the next time the precious metal falls out of favour, believes Clive Johnson. With the average cost of production now approaching $600 an ounce globally, many gold producers will simply shut down, drying up supply. At the Cambridge conference, diehard goldbugs appeared to be vastly outnumbered by more conventional investors who see gold and other materials as a near certain thing in a highly uncertain environment.

The week after the mining shows wrapped up, Johnson flew to Nicaragua for meetings with that country’s president. “We’re the fourth-largest employer in Nicaragua,” he explains. “Gold is their number 2 export, and we produce 90 per cent of it.”

He’s optimistic for the future, but also a bit wary – if not about events in Nicaragua, then about those in Vancouver. The old Vancouver Stock Exchange was mostly a good thing for the B.C. mining industry, he contends, as is the TSX Venture Exchange that replaced it. There’s a reason why almost 60 per cent of the world’s miners continue to be listed on either the TSX or the Venture Exchange. But the industry did foster a promoter culture, which he thinks may once again be on the rise: all those trade show booths and slick websites, the finely honed corporate stories that seem to distinguish Vancouver-based exploration companies from many of their counterparts elsewhere. With prices on the rise and optimism in the air, he’s noticed that some people and projects from the swashbuckling old days are back on the scene. “There have always been some dogs,” he says, “and they still bark.” [pagebreak]

The Gold Diggers

Here’s a tiny core sample of Vancouver-based exploration companies with some interest in gold.

B2Gold Corp.

In its own words: “A Vancouver-based gold producer with two mines in Nicaragua and a strong portfolio of development and exploration assets in Nicaragua, Colombia, Costa Rica and far-east Russia.”
Recent news: In January gold production commenced at the company’s Orosi mine in Nicaragua, joining the Limón mine there, which resumed operating in November after a labour dispute. Combined production is expected to reach 120,000 to 130,000 ounces in 2010.

Eldorado Gold Corp.

In its own words: “A gold producer active in exploration and development in Brazil, China, Greece, Turkey and surrounding regions. Our goal is to produce over one million ounces of gold annually by 2013.”
Recent news: In January the company announced it would resume operations at its White Mountain mine in Jilin province, China. The mine was shut down due to a dispute over alleged water contamination. Eldorado acquired the mine through its December purchase of Sino Gold.

Exeter Resource Corp.

In its own words: “Our focus is the discovery, evaluation and development of gold deposits in Chile and Argentina.”
Recent news: In December Exeter was added to the S&P TSX Global Gold and Global Mining Indexes. Earlier the company reported high-grade gold and silver results at its Cerro Moro property in Argentina.

Goldcorp Inc.

In its own words: “One of the world’s largest gold mining companies with the strongest production growth profile among all senior gold producers.”
Recent news: In January Goldcorp won a battle to acquire junior miner Canplats (also Vancouver-based), notable for its Camino Roja project, a rich gold-silver deposit in northeastern Mexico. In a complicated arrangement with New Gold, the company is also expected to buy Swiss-based Xstrata’s 70 per cent interest in the El Morro copper-gold project in Chile. The combined purchase prices would approach $1 billion.

Ivanhoe Mines Ltd.

In its own words: “Ivanhoe Mines’ key asset is the Oyu Tolgoi Project, the world’s largest copper-gold development project, 80 kilometres north of the China border in Mongolia.”
Recent News: In October, in a ceremony held at the Mongolian state palace and broadcast live on Mongolian TV, officials from Ivanhoe and London- and Australia-based Rio Tinto signed a long-term investment agreement for the Oyu Tolgoi Project. In November a 2010 construction budget of US$758 million was announced.

New Gold Inc.

In its own words: “An intermediate gold producer with a portfolio of global assets in Mexico, Canada, Australia, Brazil, Chile and the United States (Alaska).”
Recent news: In December New Gold announced it was granted an injunction related to the suspension of operations at its Cerro San Pedro mine in Mexico. The court ruling temporarily overturned the Mexican environmental enforcement agency’s order to suspend operations.

Pacific Rim Mining Corp.

In its own words: “An environmentally and socially responsible exploration company focused exclusively on high-grade, environmentally clean gold deposits in the Americas.”
Recent news: In December two more anti-mining activists were murdered in El Salvador, bringing the total to three for the year. Local pro-mining supporters are suspected; Pacific Rim has denied any involvement. The company awaits a CAFTA hearing into Salvadoran legislation that has suspended development of its El Dorado deposits.

Red Back Mining Inc.

In its own words: “Rapidly building a leading African gold producer. Red Back’s two key projects are the Chirano Gold Mine in Ghana and the Tasiast Gold Mine in Mauritania. In addition, the company holds an extensive exploration portfolio both in Ghana and Mauritania.”
Recent News: In November Red Back announced record third-quarter net income of $35 million. The company was also ranked fourth in the Vancouver Sun’s list of the Top 50 Strongest Companies in B.C.