Gold's global fluctuations hits local miners hard
By Ken Alltucker
Nobody is more aware of the global forces tugging at their lives than Roy Neukam and his buddies at Water Hole No. 1 in Golconda.
The drinking outpost is in front of a handful of mobile homes where many single miners live. It's also the oracle for the region's gold mines, where fact, theory or rumor is sure to filter through.
"I see gold's up to $260 today," said Neukam, sipping a beer one recent morning after a shift as a hauler at Getchell Mine in Humboldt County. "I don't own gold, but it does affect everyone around here ... I may have to wrestle up another job."
Rather than rely on word from corporate headquarters, Neukam and others keep a close eye on the bar's television, tuned to a financial news network that periodically flashes the spot gold price on a trading exchange in New York City.
The other number these miners have embedded in their head is the cost to pluck an ounce of gold from the earth of the mine where they work. As 2,700 miners in rural Nevada have learned in the past two years, when the spot price drops below what it costs to get the gold, their jobs are in jeopardy.
Gold has lost more than a third of its value in the past three years. The price closed at $267.80 an ounce on Friday.
"If we get down to $200 an ounce, there aren't many mines in the world that can produce at that price," said John Dobra, a University of Nevada, Reno economist and director of the Natural Resource Industry Institute. "The average Nevada mine can't."
The price of gold has sunk under the weight of international trends that have little to do with Nevada, which trails only South Africa and Australia in gold production. But those larger forces reach into the living rooms, the town halls and the main streets of towns such as Battle Mountain and Winnemucca, displacing families, unraveling communities and creating a general sense of unease. Nevada's miners have lost their jobs since gold prices started to tumble in 1996, and the slump has trickled down to the businesses and communities that depend on miners and their money.
Neukam and the other miners have heard the explanations over and over: The allure of gold is fading in an era when inflation seems licked, major industrial nations are at peace and a runaway stock market makes any other investment seem foolish. These factors have made it easy for central banks to sell gold, which has long reigned as the traditional backer of paper currency but now struggles to keep its place in an electronic age.
"I don't think it's the central banks' fault or the miners' fault," said Andy Smith, a commodities analyst for Mitsui Metals in London. "It's just progress."
GOLD STARST TO GO BUST: At the time, gold mining was an afterthought in Nevada - previous prices for gold weren't high enough to encourage many companies to look seriously at the state's ore deposits. The state's gold-mining industry steadily increased production in the late 1980s and early '90s, while Cold War tensions thawed and the global economy gained momentum.
Gold's first price shock this decade came in 1992 as European countries signed the Maastricht Treaty, which laid the groundwork for the European Monetary Union to create a common currency, the euro.
The concern among gold producers was that European central banks, which generally set the monetary policies and issue each nation's currency, would sell gold reserves en masse as they realigned behind the euro. Even though that fear has never materialized in one major auction, these banks have sold 51.4 million ounces of gold since 1992 - slightly more than the 50.3 million ounces extracted from Nevada mines during the same time period
Other hits that followed include a 1996 threat by Switzerland to sell up to 41.8 million ounces of gold and the Asian financial crisis of late 1997 and 1998, which took the biggest gold buyers out of the market. Asian consumers over the past decade have bought more than two-thirds of world gold output in the form of bullion and jewelry.
Then, on May 5 of this year, the Bank of England ignited another price drop when it announced it would auction more than half its gold to invest in higher-yielding assets such as U.S. bonds. Although the English sale is a relatively small amount - 13 million ounces - it had a significant impact because most market watchers didn't expect it.
All these triggers have combined for a slide in gold prices from $404 an ounce in February 1996 to a current price of $267.80 an ounce. When adjusted for inflation, the price of gold is at its lowest level since 1972.
MINES CUT BACK:
RENO GAZETTE-JOURNAL
Nevada mines have laid off employees 28 separate times in the past two years, eliminating 2,700 positions, according to the Nevada Department of Employment, Training and Rehabilitation's Rapid Response unit. A vast majority of those pink slips were handed to gold miners, but more than 500 copper miners also have been put out of work when copper mines in Ely and Yerington shut because of that metal's price slide.
The average Nevada mine last year spent $179 to pull each ounce of gold out of the ground, compared with $229 an ounce in 1996. That made Nevada's mines more efficient than the world's leading producers: South Africa, at $246 an ounce, and Australia, at $205 an ounce.
In fact, Nevada has two of world's 10 least-expensive gold mining operations: Barrick Gold's Meikle Mine and Placer Dome's Cortez Mine.
Despite the layoffs and other cost-cutting measures, many Nevada mines are operating on thin profit margins and could face further cutbacks or closure if gold doesn't rebound.
The latest casualty was Henderson-based Alta Gold, which filed for Chapter 11 bankruptcy protection this spring because gold's low price and production problems created a cash crunch. Many employees such as Delmer Neitzel of Ely kept a close eye on the company's financial situation, aware operations could cease at a moment's notice.
When Neitzel transferred from the company's Griffon Mine near Ely to Olinghouse northeast of Reno, he decided to not rent an apartment or buy a home. "I just curled up in my truck at night; figured it would be the smartest thing to do," said Neitzel. He made a wise decision: Alta Gold shut down Olinghouse in August, putting 75 more miners out of work. Neitzel says he plans to take computer courses at Great Basin Community College, but he first must brush up on general education studies. Well aware of what gold is facing, he wants out of the business despite the generous pay and benefits he fetched at Alta Gold. In fact, miners are among Nevada's highest-paid workers, with an average salary of $52,824 a year.
Many of his old colleagues simply packed their belongings and went on to another mining job. "They're die-hards, waiting for something to work for," Neitzel said. "A lot of people just vanished in the middle of night." These miners stay in the business because it's hard to find jobs in rural Nevada that pay anywhere close to as well.
"These are jobs that pay high incomes in non-metropolitan areas, but to much of the rest of the population they are invisible," said John Mitchell, an economist with U.S. Bank in Portland, Ore. Mitchell draws a parallel between mining and the timber and fishing industries in Oregon and Washington. Like Nevada's mining industry, those two states were founded on industries that tapped natural resources.
But in the 1990s, Oregon's timber industry has suffered from foreign competition and tight environmental regulations. Washington's commercial fishing industry has taken a hit from governmental restrictions and a dwindling salmon population. Yet both states have enjoyed unprecedented economic booms, thanks mainly to good times in technology and other sectors.
"You think of some industries that sort of symbolize what a man might do - you talk about mining, fishing and timber," said Mitchell, who closely monitors the economies of the Pacific Northwest, Nevada and other Western states. "There is a real mythological ruggedness to these industries ... that are beset in a world of changing values amidst general prosperity."
GOLD'S OUTLOOK: But as miners struggle, they remember Nevada's history of booms and busts, and look forward to another age of prosperity.
Indeed, Nevada's mining industry has enjoyed a modern-day gold rush since the early 1980s, when methods of extracting precious metals were invented and refined and several large-scale operations started in the hills across the rural northern and eastern areas of the state. Among the new technologies was one called heap-leach, in which cyanide was used to extract small amounts of gold from tons of ore.
In fact, despite widespread layoffs, Nevada mines last year yielded a record 8.86 million ounces of gold worth $2.6 billion, according to an economic report written by Dobra. Nevada is the dominant gold-mining state in the nation and accounted for 11 percent of world gold production last year.
These mines also paid $14.9 million to the state's general fund and $17.3 million to county governments.
The state's mines achieved record production levels with leaner staffs largely because of the estimated $10 billion that companies have invested in Nevada since 1980. Mining officials say gold production at Nevada's mines this year will not match last year's pace, and many mines are cutting back exploration budgets in an effort to eke out a profit.
"The industry is not sustainable at its current production levels with these prices," said Bruce Hansen, chief financial officer and senior vice president of Denver-based Newmont Mining Co., North America's largest gold producer and a dominant Nevada mining company. "I think we are in a better position than most, but we will see some others fall by the wayside."
Smith, the London analyst, predicts the average price will drop another 20 to 30 percent, though he won't say when that could happen.
The reason: The world is different than 20 years ago. Information is delivered so efficiently and quickly that markets react on the spot to political events. Also, stock markets worldwide are generating amazing returns for investors. And conservative government-backed investments such as U.S. bonds are taking over the safe haven crown that gold has carried for thousands of years.
"Gold as a store of value has diminished," said Sung Won Sohn, Wells Fargo's chief economist in Minneapolis. "Not only in the U.S., but more importantly in the Middle East, China and Southeast Asia." Asians are investing their extra money in stocks, U.S. government bonds and other paper instruments as their economies recover, Sohn said.
"To hold gold, it actually costs you money," Sohn said. "There is a lack of liquidity. You have to actually store it somewhere and pay someone for that. It doesn't pay interest or dividends."
Smith has an even more blunt description of gold's prospects. "You would have to make the world go backwards 20 years" to reverse gold's fortunes, he said, noting advances in telecommunications, technology and shifts in global economic power. "There's nothing in the Dead Sea Scrolls that give gold mines a right to eternal life."
STAYING OPTIMISTIC: Dobra said there are positive signs. Word emerged this month that the International Monetary Fund no longer supports a plan to sell 10 percent of its reserves on the open market for debt relief to poorer countries, many whose economies are based on gold mining. And consumers in India, who didn't suffer the economic pinch to the extent of their Asian neighbors, took advantage of lower prices to increase gold imports in 1997 and 1998.
Ironically, demand for gold actually is at record levels, according to the London-based World Gold Council. But consumers' desire to buy jewelry and bullion coins is being met not by mines but by gold bars being moved from central bank vaults to the open market. "It's being met by above-ground stock," Dobra said.
Another factor that could help the price of gold is decreased worldwide production, itself spurred by falling prices. Through the first half of 1999, Nevada mines didn't retrieve gold at the same pace as a year ago. One of South Africa's oldest mining companies, East Rand Proprietary Mines, said this summer it would liquidate its assets, jeopardizing 4,500 jobs. Other South African mines announced plans to eliminate more than 10,000 workers, drawing protests.
"You already see people exiting the industry," Mitchell said. "That may, over time, reduce the production levels." Sohn said he believes it will take a monumental world event to drive up the price of gold, such as a war on the Korean peninsula or Russia returning to Communist rule.
Back at the Golconda bar, the miners who congregate daily also puzzle over the chain of events manipulating their lives.
"I put this (channel) on every day and the miners come in and check it. It's funny how many guys come in and watch the price of gold and the price of the stock of the company they work for. They're all worried about jobs," said Water Hole owner Ken Goodness.
Goodness, who's been in Golconda for 21 years, knows all about mining's boom-and-bust cycle. What's happening now, according to Goodness, is nothing special.
"I've seen the valleys many times," said Goodness, who recalled 1979, when bar business was really slow. But Goodness said Humboldt County officials didn't do enough during the boom to prepare for the bust. "Humboldt County has got to learn to diversify," he said. "They haven't learned that yet."
In Winnemucca, the county seat, Jackie Kearns agrees. "The penny has finally dropped in this town," said Kearns, who helps train unemployed miners for other jobs as manager of the Winnemucca office of Job Opportunities in Nevada.
"If we don't diversify, we'll be the cow town we've always been between (mining) boom cycles."