Miners soak up gold rally and rising costs


(Reuters) - 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 produced by companies such as Barrick Gold (ABX.TO) and Newmont Mining (NEM.N).

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.

"When I sit down with governments, I say the headline is gold prices are up, but behind the headlines you need to understand costs are up and capital numbers are up as well," Newmont CEO Richard O'Brien said.

Costs to find, finance and produce gold are probably between $900 and $950 per ounce, he said.

"That's even before we pay taxes," O'Brien said. "We're making a profit and we're not going to complain about it, nor are going to shirk our commitments to the communities. But don't think that gold prices are at $1,400 and costs are at $350. That's not where we are anymore."

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.

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The move to increase governments' share of the gold revenues has occurred worldwide but still forces companies to carefully consider where they will put new mines, according to Greg Hawkins, CEO of African Barrick Gold (ABGL.L)

"It's a tough one. Once you've started a mine, you can't move it ... so you are a little bit hostage to changes in the rules," he said.

Mining companies want to make sure that tax policy-makers are disciplined in how they make royalty changes, he said, and are aware of the large amounts of capital that companies pour into new projects.

He praised the East African nation of Tanzania, whose recent moved to raise royalty rates to 4 percent from 3 percent was applied only to new projects.

Still, part of the issue around rising costs is caused by the high price itself, according to Toronto-based Agnico Eagle Mines (AEM.TO), as miners have the incentive to chase lower-quality ores that produce less gold.

"In a high gold price environment, when companies do their annual reserve calculation, they lower the cut-off on what becomes economic and what becomes waste. And that lowers (ore) grade, which raises unit costs," Chief Executive Sean Boyd said. 
Still, 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.

(Reporting by Matt Daily, Euan Rocha and Julie Gordon and Pav Jordan in Toronto, Eric Onstad, Amanda Cooper and Julie Crust in London, Writing by Matt Daily; Editing by Frank McGurty)
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