Miners Soak up Gold Rally and Rising Costs

Source: Reuters (3/22/11)

"For gold miners, it could be a case of more money, more problems."

For gold miners, it could be a case of more money, more problems.

Producers of the precious metal are the most obvious beneficiaries of the 30 percent rally in the precious metal's price over the past 12 months, but those miners are taking pains to prove to governments that their profits are not that glittering.

Gold prices have raced to their highest ever, touching $1,444.40 an ounce this month as investors snap up the currency safe haven as global inflation fears rise and instability spreads across the Middle East.

Governments from Australia, Chile, the U.S. state of Nevada and the Canadian province of Quebec have passed or considered increases in their royalties on gold.

Executives told the Reuters Global Mining and Steel Summit they have made a case to governments that the costs to tap into gold deposits have skyrocketed in recent years, so their profit margins are not rising with the metal's price.

Costs to find, finance and produce gold are probably between $900 and $950 per ounce, Newmont CEO Richard O'Brien said.

"That's even before we pay taxes," O'Brien said.

Still, gross profit margins at most gold companies did increase in 2010 from 2009, according to data provided by RBC Capital Markets, and are likely to continue to widen over the next year or two.

Even with the sky-high price, the industry faces ever more daunting prospects in tapping more difficult deposits that are straining its ability to produce gold.

"Unless we have a technical breakthrough. . .we're going to see a business that is in long-term decline," Newmont's O'Brien said.

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