Gold is often considered a safe haven for investors when things get too turbulent on the geopolitical and economic fronts. However, gold investing comes with its own set of idiosyncrasies that investors need to consider. Here are three of them and how they affect gold companies on the TSX:
1. Approval delays can hinder project plans significantly
Eldorado Gold Corp. (TSX: ELD)(NYSE: EGO) knows this full well as this situation currently applies to its Perama Hill project in Greece. The company does not have a set time frame for the Environmental Impact Assessment (EIA) approval required for this particular project.
Eldorado Gold’s operations remained delayed due to its outstanding EIA approval for Perama Hill. Following the municipal and European elections, the company has engaged the government at the ministerial level regarding this matter.
The Perama Hill project — which it acquired project in 2008 through the acquisition of Frontier Pacific — is in Eastern Thrace, Northern Greece, and Eldorado Gold owns this project 100%. The deposit is an epithermal gold-silver vein deposit and the expected mine life of Perama Hill is eight years. This project did receive its Preliminary Environmental Impact Assessment approval in February of 2012.
The estimated annual gold production for Perama Hill is 104,000 ounces. Eldorado Gold’s forecast production date for this project is 2016.
2. Significant capital expenditures
Mining is a capital-intensive business and this reality often causes strategy shifts for gold miners. IAMGOLD Corp. (TSX: IMG)(NYSE: IAG) is looking to sell its Niobec mine in Quebec within the next six months to a year for approximately $500 million (after taxes).
The reason Niobec is going up for sale? It will cost IAMGOLD approximately $750 million to extend its mine life beyond its current eight years. Therefore, the company sees greater value in reaping the benefits of a sale than spending significant funds on the mine.
This is a true example of a critical-eye cost-benefit analysis by an experienced mining company. Canadian Mining Journal reported that IAMGOLD President/CEO Steve Letwin “…conceded that Niobec is IAMGOLD’s “best-performing mine” and a “great asset” that throws off about $100 million to $110 million in EBITDA a year yet has modest sustaining capital costs of between US$25 and US$30 million a year.”
3. Political uncertainty can weigh on projects
Kinross Gold Corporation (TSX: K)(NYSE: KGC) has its combined Kupol and Dvoinoye operation in Russia and saw nice results there in Q2 2014. TheKupol and Dvoinoye operation had increased production versus Q1 2014 as well as year over year. Gold grades at the combined operation grew by 23% versus Q2 2013. Moreover, roughly 83,000 Au eq. oz. were produced from processing Dvoinoye ore in the expanded Kupol mill during Q2 2014.
However, Kinross is carefully watching the political situation in Russia, the Ukraine, and the rest of Europe. Its operations in Russia have so far been unaltered by economic sanctions. The company is taking action to alleviate or lessen potential future effects on its Russia operations. To that end, Kinross has accelerated its shipping procedure and the company now has all of its vital supplies in Russia for 2015 and into early 2016. Kinross is being proactive in this regard as it does not know what future sanctions may be and what effect they may have on its operations.
You don’t have to be afraid to invest in gold companies. You just have to understand the vagaries of the environment in which they operate and then make informed investing decisions accordingly.