Mining Industry
Mining has played a very significant role in human life from prehistoric times to the present. Furthermore, various cultural eras were identified based on specific mineral extracts or their derivatives e.g. the Iron Age (1500 B.C.E. to 1780 C.E.). Mining, particularly, can be described as the process involved in the extraction of minerals from the earth including surface waters and wells. Mining industry is used to define various functions such as exploration, mineral separation, electrolytic reduction, smelting and refining processes. Various methods are used to describe mining process, these include; opencast, underground and fluid mining (Figge and Hahn, 2004).
Mining is found within many countries of the world with London being referred to as the capital of global mining houses. The mining houses in London include Rio Tinto, BHP Billiton and Anglo American PLC. The United States mining industry is majorly based on coal and non-metal minerals. The total market capital for mining companies was rated at US$962 billion in the year 2007. The mining industry is basically dominated by large multinational companies most of which are publicly listed. The industry is considered to operate on two major sectors with one specializing in exploration and the other in mining of the explored resources. However, other industries such as those involved in environmental testing, metallurgy analysis and equipment manufacture all support the world mining industry. Stock exchange in Canada has its major focus in the mining companies through the TSX Venture Exchange, where capital is raised and eventually invested in global exploration (Goldcorp Inc., 2007).
The level of consumption of minerals within the world has considerably increased placing the demand at higher level in the 20th and 21st century. Such increase is attributed to higher dependency on automobiles in the transport sector within the society. At the same time the use of heavy machinery for production amongst other human and industrial services has had its fair share of contribution. The United States is considered as a major importer of minerals and large producer of mineral products. However, the conservation on mineral resources has become a crucial issue within the society making the mining industry endorse policies favoring extraction of minerals (National Mining Association, 1998).
Mining and gold Industry Analysis
Considerable growth has been realized since the beginning of the financial crisis within the Gold Industry. Gold prices were rated at $639 in early 2007 just before the commencement of the financial crisis. The price increased with a higher percentage to $1220 in the year 2010 making investors and governments benefit from high interest rates. The uncertainties anticipated within the world financial markets and the relation between gold and world currency has been the cause of rise in gold prices. This has contributed to the harnessing value of gold, hence a boost to all mining ventures. The precious metal benefits more in the circumstances that the price raises amidst decreasing dollar value (Zeal LLC, 2010).
According to a 2012 report by the U.S. Geological Survey , for instance, gold mining witnessed an increase in popularity for Gold Exchange Trade Funds (ETFs) amongst investors has been witnessed all over the world. This has been attributed to world’s economic instability and hence has drowned investor confidence. Predominantly, investors are now purchasing gold ETFs directly from stockbrokers thus reducing some of the worries associated with fluctuating prices. As per 2011 records, Australia had the highest gold reserves standing at 7,400 followed closely by South Africa at 6,000. United States’ reserves lay at 3,000 with the total world gold reserves amounting to 51,000. U.S particularly, had 18,000 tons of undiscovered gold resources with 15,000 tons more being identified. This represented an increase in estimated net exports from 231 in 2010 to 237 in 2011.
Further assessments of gold prices in the year 2012, gives survey results from companies representing approximately 26.5 million ounces of gold that was mined in the year 2011 and projection of approximately 37.75 ounces anticipated to be mined in 2012. Most of the gold companies expected increase in gold price within the current year. A good percentage of the companies’ value the prices to have increased to 23.4% and the S&P/TSX Global Gold Index to have increased by over 3% in November 2011. The stock prices of most companies are impacted positively by the gold price (Zeal LLC, 2010).
Chart 1: Graph showing gold market price in USD
Impact of gold’s price
Investors within the gold mining industry are currently not excited about the mining companies despite the soaring gold prices. This could be attributed to the availability of variety of financial products within the market, such as ETFs. Gold stocks value has declined despite gold price increase in 2011. Investors have opted to use alternative financial products to purchase gold instead of investing in mining stock, since the various companies have been faced with frequent strikes. Workers are constantly demanding higher wages and good working conditions as gold price continues to increase. Gold companies experienced strikes between the years 2009 and 2011 and this made them to suffer production decline at an average of 550 ounces daily. The strikes affected the stock price of the various listed gold mine companies (Zeal LLC, 2010).
Gold industry has provided most nations with alternative and ways of boosting investor confidence. Countries are focusing on gold with a bid of helping them cope with the prevailing volatility within the financial markets. At the same time, Central banks seeking diversification of their foreign exchange resorted to gold purchase. The purchase of gold in the third quarter of 2011 was over 148 tones. Gold is also playing an important role in the diversification of foreign exchange reserves within the Asian and American countries. Countries with emerging markets on gold have recorded low percentages of holdings in gold trade, for example countries such as Brazil rates at 0.5%, China 1.7%, Mexico 4% and Peru 3.8% (Zeal LLC, 2010).
The cash costs are on the upward trend within the gold industry since the year 2001, cash costs increased annually by an average of 8% annually. The rise in costs could be attributed to conditioning due to lean cost structures in the 1990s. The cash costs have recorded progressive increase with 2010 giving average costs which are 214% higher compared to records in 2001. Gross margin within the industry is computed by taking proportion of each dollar of revenue which the gold company retains as gross profit. The total gross margins remain the same from 2002 to 2005 and also from 2007 to 2010 despite increase at the rate of 67%. However within the gross margin calculations some parameters are not calculated such as depletion, amortization costs, depreciation, alongside reclamation and mine-closure costs. All past non-cash expenses and charges imposed on capital investment are considered to be part of total production costs according to Gold Institute measures (Zeal LLC, 2010).
Mining despite being capital intensive venture is also considered to be highly risky. This shows that gold mining requires higher margins for proper running and maintenance of equipment. The rise in demand for gold and other minerals calls for higher supply pressure. Conclusively, even though there seems to be significant increase in cash costs, the rise in gold price is what constitutes strong margins. The lucrative margins makes the stocks of mining companies more appealing to investors, hence call for high productivity for the purposes of meeting the increasing market demand (Zeal LLC, 2010).
Goldcorp Inc. Canada
Reports reveal that Gold Mining companies stand as some of the multi-million mineral companies providing their shareholders with reasonable returns originating from massive asset background. The companies especially Goldcorp Inc. has been identified as one with strong and liquid balance sheet. Most of the achievements can be based on the nature of their facility expansion, increasing trend in gold prices and the company’s policy and strategy concerning acquisition of properties. Recent statistics reveal gold trend to be on the positive dimension despite the higher interest rates as well as future market forces which could interfere with the pricing. The aggressive nature of Goldcorp Inc. acquisition policy remains a threat to the rest of the companies within mining industry. However, the company has been identified to be facing both environmental and execution risk at its Amapari and Los Filos project lines. Such presents some of the potential production risks the company faces currently (Zacks Investment Research, 2011).
Goldcorp Inc. has a long-term growth strategy based on its strong operational performance as well as potential acquisitions. The company’s growth profile and assets makes it outstand as one of the leading producers. The increase in production is expected to be approximately 57% within the next five years. Projection on production levels is approximated to reach 3.5 million ounce by the year 2013. The financial reports released in the year 2011 recorded that the company’s net earnings in the second quarter were $489 million which was slightly lower than that of the second quarter of the year 2010 which was stood at $ 524 million (Zacks Investment Research, 2011).
Statistics identifies approximately 80% of the employees in the Goldcorp Inc to be from local communities with less that 2% recruited from international market. Operational wages are also recorded to be higher than the norm within the various communities with over 90% of their goods and services sourced from the local market within the regions of operation (Goldcorp Inc., 2011). Goldcorp Inc. mining operations contributes larger percentage towards economic development, hence making the company’s goals and objectives to focus on strengthening local economies (Ekins, 2005).
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