The new global gold rush

ANDY HOFFMAN

From Saturday's Globe and Mail

February 29, 2008 at 8:54 PM EST

Tye Burt has always been able to get the most out of the unwanted, the discarded and the overlooked.

As a young boy growing up in Green River, Ont., he would vigorously polish bruised apples from his family's orchard and then sell them to motorists on the side of the highway at full price.

It was a trait that he carried with him. Four years ago, on a trip to Nova Scotia, Mr. Burt purchased a decrepit wooden schooner, a vessel that had been a star exhibit at Expo 67 but had been so neglected it was barely seaworthy.

The mining executive oversaw painstaking work that restored the schooner's former grandeur to the point when last fall the Atlantica was suitable for the Duke of Edinburgh to enjoy as part of a Canadian charity tour.

Kinross CEO Tye Burt

Those were mere fix-up jobs, however, compared to what Mr. Burt has done since taking on the top job at Kinross Gold Corp. in 2005. He gutted the management team and orchestrated a corporate restructuring, and is now taking the Toronto-based miner into places many once feared to tread. His favourite destination? Russia.

"As we see the traditional sources of gold production, like South Africa, like the United States, like Canada in decline, Russia is growing in prominence and in prospect," Mr. Burt says. He suggests there are 300 million to 400 million ounces of untapped gold in Russia.

Kinross is by no means the only gold miner jetting off to wild and wooly regions. Amid record gold prices — bullion settled at $975 (U.S.) an ounce in New York after surging to a record $978.50 yesterday — the entire industry has had to look beyond its comfort zone. Way beyond.

"The places you can go to find and develop new deposits in a friendly way are shrinking," Mr. Burt says.

In what could be a new gilded age, countries like China, Russia and some developing parts of Africa are poised to become the new bullion-producing juggernauts, despite the fact that foreign miners have had trouble securing certainty of their land titles in these areas. Those willing to take on the risk of trying to build mines in these countries could be in for huge rewards — or humongous heartbreak.

"Regions that a few years ago the majors wouldn't look at are becoming increasingly attractive," said William Tankard, a senior analyst at GFMS Ltd., a London-based consulting firm to the precious metals mining industry.

China, with a hundreds of small gold mines operated by a seemingly inexhaustible labour force, recently ended South Africa's century-long reign as the world's top-producing gold nation, according to GFMS.

China produced 276 tonnes of gold in 2007, or roughly 9.7 million ounces. That was a 12-per-cent jump from 2006, GFMS said. By contrast, South Africa — the world's largest gold producer since 1905 — produced 272 tonnes, an 8-per-cent decline from the year before.

Faced with the rising technical and safety challenges to mine ever-deeper deposits, as well as production cuts due to electricity shortages, South Africa is unlikely to ever regain its title as the planet's best place to mine gold.

In South Africa's wake, the smart money is all over the map.

Just last month, Richard O'Brien, the head of Newmont Mining Corp., conceded that the world's second-largest gold company will have to travel to places it had once considered off limits in its quest for rich sources of the precious yellow metal.

"We enjoy staying in regions with a more stable environment like Canada," Mr. O'Brien told analysts. "[But] people ask when we will go to China, Russia or the Democratic Republic of Congo. I can't say when, but at some point, I anticipate we will be in all of those."

Gold miners have always had to go where the gold is but the current dearth of large-scale deposits in mining-friendly countries has created unprecedented challenges. The sands of the gold mining industry are shifting and they are headed toward places mired in alarming uncertainty.

"I'm going to predict that other major mining companies are going to go to Russia in some size in the future," Mr. Burt says. "There will be partnerships in multiple metals. So yes, we're well positioned."

KINROSS REBORN

That wasn't a claim Mr. Burt would have made when Kinross lured him from a senior management position at Barrick Gold Corp.

At the time, Kinross was a basket case of a gold company, burdened with a scattered portfolio of high-cost and mostly low-grade assets, largely controlled by the company's joint venture partners. Its prospects for growth were dismal.

Kinross looked destined to be stuck with shrinking reserves and flat production hovering around 1.5 million ounces of gold per year. The situation was so bleak that, in the midst of an investigation by the U.S. Securities and Exchange Commission into the way the company had accounted for a three-way merger with a pair of Canadian rivals, Kinross didn't published financial results for a year.

"Nobody was considering Kinross as a serious investment or a serious player," said Catherine Gignac, an analyst at Wellington West Capital.

Many investors thought its best hope was as a takeover candidate.

Less than three years later, Mr. Burt has orchestrated a stunning turnaround, positioning the company as a growth leader rather than suffering prey.

The company's gold mine portfolio has been transformed to focus on better-quality mines in fewer regions, including Chile and Brazil, where Kinross has full control of operations, cost expenditures and exploration spending.

A $3.5-billion takeover of Bema Gold that closed early last year helped give Kinross bragging rights to the best near-term growth prospects among major gold producers.

Annual production is forecast to rise 60 per cent over the next two years to 2.5 million ounces as a massive expansion of its low-grade but long-life Paracatu mine in Brazil comes to fruition, along with a new mine in Washington state.

Yet with the price of gold charging toward $1,000 an ounce, Kinross's most promising asset in the short term is also its most contentious.

Less than three months from now, Kinross will begin commercial production at its $705-million (U.S.) Kupol project in Russia, well north of the Arctic Circle.

The mine is endowed with an exceedingly high grade of roughly 19.5 grams of gold per tonne of ore. That will make it one of the lowest-cost gold mines in the world at a time when bullion producers are grappling with soaring costs.

In gold mining, however, a mine's location can be just as important as its economics. And with Kupol, more daunting than its remoteness is Moscow, nine time zones to the east.

'THE NEXT BIG PLACE'

Few dispute Russia's promising mineral potential. Currently the world's fifth-largest producer of gold, it has 9 per cent of the world's gold reserves.

Mr. Burt believes his company is blazing a trail that will soon be crowded with larger competitors looking to partner with Russia's domestic producers. "From a resource perspective, I think Russia is the next big place," he said.

Seventy-five per cent owned by Kinross, Kupol will be the largest foreign-controlled mining operation ever in Russia. (The minority is held by the local state government of Chukotka.) Kinross, of course, is no stranger to the country. The company has been mining gold in the far east of Russia for 12 years, first with its now mothballed Kubaka mine, which it sold to Russian producer Polymetal last year for $15-million, and currently with its Julietta mine, which it acquired as part of the Bema takeover along with Kupol.

Key to the company's success in Russia, according to Mr. Burt, has been keeping strong ties with Moscow, vigorously avoiding corruption and being a "good corporate citizen" by funding social programs and infrastructure development in the local areas where it operates. "You have to put in the time," he said.

Russia, he says, has proven to be a far more stable mining jurisdiction than countries such as Venezuela, Ecuador and Bolivia that have seized resource assets from foreign companies, or even Argentina, which recently imposed unexpected export duties on gold and base metals production.

"There has not been any history of government interference in the mining sector. Nobody has been expropriated. There have not been radical changes to the tax regime. That behaviour has been seen in many other jurisdictions. It has not been seen in Russia," he said.

THE MOSCOW FACTOR

Kupol is, however, a far more valuable deposit than either Kubaka or Julietta, particularly as gold prices hit new records. While Kupol has only 3.2 million ounces of proven and probable gold reserves, its high grade is expected to make it one of the world's highest-margin gold mines, with production costs averaging between $210 and $220 an ounce — more than $100 below the industry average.

Russia accounts for just 8 per cent of Kinross's 47 million ounces of gold reserves but TD Securities analyst Greg Barnes recently told clients that Kupol is the second-largest contributor to his calculation of Kinross's net asset value behind Paracatu.

"The company's significant exposure to Russia provides some cause for concern … any political interference in the mine would, in our view, have a materially negative impact on Kinross's valuation," Mr. Barnes wrote in a report.

Kinross maintains that the mine's ownership structure will be a crucial element to success. The mine is expected to create 1,200 local jobs and spinoff employment for local businesses. As well, Kinross will pay a corporate tax rate of 24 per cent and an off-the-top royalty of 6 per cent.

As for possible legislation that would deem major deposits "strategic assets," Kinross said Kupol will be grandfathered under any new law.

"As a currently permitted and already-built project, we are exempted from that. We have had assurances in writing and in the legislation," Mr. Burt said.

Canadian gold guru Pierre Lassonde thinks otherwise, saying in an interview: "I wouldn't put a dime in Russia."

Mr. Lassonde — the former president of Newmont Mining Corp. and current chairman of relaunched mining and energy royalty company Franco-Nevada Corp. — believes the rule of law in Russia is far too murky for a Western mining company to invest the hundreds of millions of dollars needed to build a mine.

"It's bandit capitalism. Every time a foreign company has success in Russia, they find a way to legally take it away from them," he said.

Well-regarded gold investor Charles Oliver of Sprott Asset Management said he is "cautiously optimistic" about Russia as a destination for mining firms, but he is not as enthusiastic as he once was.

"There are concerns on [mining] title. We haven't seen anybody had their mine taken away, but it is the kind of thing where you want to tread carefully," Mr. Oliver said.

Despite the political noise, Mr. Burt maintains that Russia, with its massive store of gold reserves, is simply too big to ignore and even his old employer Barrick will be lured back to country.

"The supermajors have no choice. That's why you see Barrick in Pakistan and that's why you hear [Newmont's] Richard O'Brien saying those things. They have a big tiger to feed and they are going to have to go to those places. Do we have a head start? I firmly believe we do. Are we going to be unique in five years? No. These big companies have lots of resources and they'll be coming, too. I think we have an edge. Part of the edge is our size, part is our experience and part is our relationships. We are there."

ADVANTAGE CANADA

Canada has seen its share of global gold production cut by nearly half over the past 13 years. In 1995, Canada accounted for 6.8 per cent of world gold production, but by last year, it had fallen to just 3.8 per cent, good enough for eighth place among gold producing nations, GFMS said.

Between 1995 and 2005 Canada's gold reserves plunged 40 per cent, according to the Mining Association of Canada, falling to 971 tonnes from 1,540 tonnes.

Yet with the largest concentration of junior mining firms, Canada as a country still ranks No. 1 in mineral exploration spending, accounting for 19 per cent of the $7-billion (U.S.) spent on exploration in 2006 according to Halifax-based Metals Economics Group.

Despite the current disconnect between exploration spending in Canada and gold production, Mr. Lassonde thinks the money is going to the right place. He believes more Canadian exploration success is certain because of improvements in geological technology.

"We are the second-largest land mass in the world, [behind Russia] and that gives us a huge advantage. Do you really believe that everything has been found in Canada? Absolutely not," he said.

OVER THE HORIZON

While Canada as a country is no longer a leader in gold production, Canadian gold miners still dominate the top of the bullion mining ranks. A willingness to operate in far-flung jurisdictions beyond their own borders has kept Barrick, Kinross and Goldcorp Inc. among the sector's heavyweights.

Producing roughly eight million ounces of gold a year, Toronto-based Barrick remains the world's largest gold miner but has just two small in mines Canada among its stable of 27 worldwide. It has been a prolific acquirer of foreign companies and assets and has major operations in Nevada, South America, Papua New Guinea, Australia and Tanzania.

Vancouver-based Goldcorp's Red Lake operations in Ontario were the largest single contributor to the company's overall production of 2.3 million gold ounces last year. Red Lake produced more than 700,000 ounces while two other Ontario mines brought the Canadian total to over one million ounces.

Yet like Barrick, Goldcorp has also been an aggressive buyer of foreign assets, avoiding the fate of Canadian nickel stalwarts Inco and Falconbridge, as well as aluminum major Alcan, which each had their flagship operations in Canada and were all snapped up by opportunistic foreign mining giants.

While the record gold price has given producers the financial incentive and wherewithal to look further afield for new gold deposits, China, the new world leader in gold production, has proven an elusive place for most. There are a few foreign companies operating relatively small deposits, including Australia's Sino Gold Mining Ltd. as well as Canada's Jinshan Gold Mines Inc. and Eldorado Gold Corp., but major Western gold producers have had little success in the country.

Barrick has had an office in Beijing since 1993 but has no mines in China.

"We have been there 15 years and we haven't found anything big enough geologically that makes sense," Alex Davidson, Barrick's executive vice-president in charge of exploration and corporate development, said in a phone interview from Tanzania.

Barrick has turned to places like Tanzania to replenish reserves, but has wrestled with labour problems that hampered production last year at one of its mines in the east African country. (Barrick fired the mine's entire work force but has since hired back more than half the workers.) Among a slew of development projects is a massive gold and copper project in Pakistan, where violence and political unrest marred recent elections.

THE LONG-TERM VIEW

In Russia, a lack of large-scale deposits has not been the problem. A survey of mining companies conducted by the Fraser Institute found that Russia ranked No. 1 out of 68 countries in terms of mineral potential.

However, it came second-to-last when it comes to regulatory duplication and inconsistencies and ranked 62nd in terms of stability of policies, narrowly besting the Congo and Mongolia but trailing behind nations like Honduras, Ecuador, Bolivia, Indonesia and China.

Russia, where an election tomorrow is expected to see Vladimir Putin's handpicked successor Dmitry Medvedev anointed president, is considering legislation that would deem all large-scale gold deposits "strategic assets." The law would prohibit foreign companies from controlling major mining operations. There have also been concerns that Russia's nationalization of oil and gas assets, in which major Western energy firms transferred ownership of assets to state-controlled Gazprom, could be repeated in the mining sector.

Political issues left Barrick so frustrated that it largely abandoned the former Soviet Union in 2006, shuffling its Russian exploration assets into producer Highland Gold Mining Ltd. for a minority stake in the company.

"I don't think it's possible for a company the size of Barrick to go into Russia and find a big deposit," Mr. Davidson said.

Turning 51 this month, Mr. Burt takes a longer view. He has been a part of the mining business for more than 20 years, first as an investment banker and as an industry executive for the past six. In 1985, he joined the former brokerage house Burns Fry, specializing in mining sector deals. In 1998, Deutsche Bank tapped him to create a global mining team — until low commodity prices led the brokerage giant to abandon the effort two years later.

In 2002, he came out of "retirement" to join Barrick. He spent much of his time in Russia and led the gold giant's foray into the country. Given the chance to skipper the Kinross ship instead of "being an admiral on an aircraft carrier" at Barrick, he made the switch.

Now Mr. Burt is heading a company with a stable of mines centred in what he believes are some of the world's most promising gold mining regions. He won't say where Kinross will look to expand next, but he certainly isn't ruling out a deal in Russia with a local partner.

"Russia, if you know your way around, is a global mining power that is on the come," he says.

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