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A nugget of wisdom for gold miners: Think small

I think I have figured out Canadian gold mining executives. They assume that gold is not a mineral; it is a perishable commodity that will rot in the ground, like a potato, unless it is dug up immediately.

And not just immediately but in vast quantities. Canadian gold mining executives are obsessed with the concept of bigness. They want projects they can label "game changers," ones capable of vaulting medium-sized firms into the big leagues, or thrust the biggies to the very top of the global heap. Bigness permeates their lives. They drive big cars, live in big houses. Some, like Barrick Gold Corp. boss Peter Munk, bob around the planet in the biggest of yachts.

The problem with bigness is that it translates into trouble when it's extended to corporate development. Big projects are big gambles. They invariably come in far over budget, sometimes billions over budget, which gets shareholders rather annoyed. Big projects also attract lots of attention from environmental activists, politicians and aboriginal peoples. The result is expensive delays and bad publicity.

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Canada's gold mining sector is a mess, with share prices down by about half even though the gold price is down by only 20 per cent from its high of almost $1,800 (U.S.) an ounce last October. Executives are being tossed into the garbage like the remains of a steak lunch. Returns on equity are sinking into single-digit territory or, in Barrick's case, turning negative. Problems at flagship projects are not going away – in some cases they're intensifying – after years of fix-it efforts.

Barrick has become the poster child of the dangers of oversized projects (to the delight of Goldcorp Inc., whose own woes, such as a Chilean court decision that suspended approval of the environmental permit for its El Morro gold-copper project, have been buried by Barrick's bad-news avalanche).

Mr. Munk acknowledged as much at Barrick's annual meeting last month. "We shot ourselves in the foot because we could have stayed put in great financial position, not started Pascua-Lama, not started Pueblo Viejo," he said, referring to the company's monster projects in Chile and Dominican Republic.

Pascua-Lama is turning into an epic disaster. The gold-and-silver play straddles the Argentine-Chilean border in the Andes and is surrounded by glaciers, making it one of the most technically and politically challenging resource projects on the planet. But it would add a massive amount of production, allowing Barrick, the top gold producer, to avoid a slow-motion suicide by running down its existing reserves. Pascua-Lama was expected to produce 850,000 ounces a year, more than the entire output of a mid-tier company such as Vancouver's Eldorado Gold, which produced 660,000 ounces last year and, until the gold price plunge, had a market value of $9-billion (U.S.).

When Pascua-Lama got the go-ahead in 2009, the project was supposed to cost $3-billion. The latest estimate is an eye-watering $8.5-billion. Barrick has already poured $4.8-billion into it, with essentially nothing to show for that. After a Chilean court ordered a halt to construction at the mine because of allegations that it was polluting groundwater, Barrick, in April, said it may put the whole thing in cold storage.

While Pascua-Lama was too big and complicated for its own good, there is no shortage of lesser gold companies that made the mistake of embracing the go-big-or-go-home strategy. The classic case is Gabriel Resources Ltd., which is trying to develop what would be Europe's biggest gold reserve by a long shot, and the third-largest in the world. It's called Rosia Montana and it's in Romania's Transylvania mountains, whose gold mines date back to the Roman empire.

Gabriel has spent the better part of 20 years and more than $400-million trying to get Rosia Montana going. Every permit required for the project, which is so big it would be visible from space, has been challenged by a superbly organized band of opponents, ranging from local farmers to (at one point) Hungarian-American billionaire George Soros. Gabriel still lacks the approval for its crucial environmental impact assessment report. Meanwhile, estimated development costs have soared to $1.5-billion from $1-billion in 2007.

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Toronto mining promoter Stephen Roman, who was involved in Gabriel in its early years, told me in 2010 that Gabriel got greedy after his departure in 2002 and stunned local residents with the mine's sheer destructive size. "All [Gabriel] saw was the dollars," he said. "They should have started with a small operation and added on to it as they gained the trust and confidence of the residents."

In northern Greece, Eldorado Gold Corp. is planning a vast series of mining projects that would see ore extraction rise tenfold at its Halkidiki mines. The regular anti-mine protests have grown so ferocious (its mine site was firebombed in February) that the conflict has been described as a local civil war. Unlike Gabriel, Eldorado has the permits to start development. But there is no doubt it is shocked by the backlash.

We won't get into Kinross Gold, which went way overboard with its Tasiast gold mine in Mauritania, another monster project.

Could Barrick, Gabriel and Eldorado have avoided a lot of the blow-back if they had scaled down their projects to half their size? You bet they could have. Bigness, which is to say greed, can backfire. Gold doesn't rot in the ground. Sometimes slower and smaller can achieve your goals faster.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More


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